The Young Fabians Economy and Finance Network reflect on the Chancellor's March Budget.
The dust has now settled on the Chancellor’s Budget. Unlike many of his predecessors’ Budgets, which often didn’t survive contact with the public, this one seems to have largely remained intact.
So, what is the Government’s economic plan for the next few years?
It’s worth saying that this Budget was much better than it could’ve been. Amidst sanctimonious cries from the Conservative backbenches, the Chancellor resisted the urge to clamp down on government spending. For instance, 600,000 more self-employed people, many of whom became unemployed in 2019 or 2020, are now eligible to claim under the Self-Employment Income Support Scheme.
Fiscal hawks in the Conservative Party are, predictably, beginning to worry about the deficit despite borrowing being undertaken at historically low interest rates. This is the wrong thing to focus on, for now, and it’s right that Sunak has deferred consolidation to later in this Parliament.
Views from the left
For the left though, it still leaves a lot to be desired. The Budget shows a clear dichotomy between Sunak’s plans for getting us out of the pandemic and his plans for the future. This split between what I refer to as ‘Crisis Rishi’ – the spendthrift Chancellor who paid the nation’s wages for six months – and ‘Future Rishi’, a neo-Thatcherite who wants lower taxes and fewer public services, was evident in the Budget.
In fairness, there is a need to reduce the deficit at some point; Labour shouldn’t pretend that higher spending can be financed forever without tax increases. But the crucial question is ‘when.’
This Budget remained highly expansionary – the government has continued to pledge large amounts of money to prop up demand in the economy. Delays to the end of the furlough scheme, increases to Universal Credit allowance, and tax relief for businesses are all examples of the government stimulating the economy. That’s a good thing, and something Labour must support, but they’re also virus-related measures. Most economists agree that substantial stimulus from both the Bank of England and the Government above and beyond the immediate pandemic-response will be required to get us back on track. In the US, Biden has passed a $1.9 Trillion USD stimulus bill. An intervention of this scale – around 10% GDP – has never been tried in a developed country, so the exact effects are very much uncertain. Nevertheless, it puts Sunak’s measly response into perspective.
So far, the Chancellor hasn’t announced economic support for the period after the economy begins to reopen but before consumer demand returns to normal. Sunak appears to be pinning his hopes to a consumer-led recovery, in which those who’ve built up savings over the pandemic rush out to spend. If that happens, that’s good news for the economy, but the public sector will play an important role. However, if consumers are reluctant to return to normal – if they are loath to crowd into restaurants or spend extravagantly in bars – we could run into serious trouble. Sunak should be announcing measures now to help kick-start the economy. When the virus itself is defeated, the UK will still face the largest economic crisis since the Napoleonic Wars. The economy is currently being propped up by support measures such as the furlough scheme so the true extent of the economic damage Covid has caused is not yet visible. The Budget was therefore profoundly lacking on this front.
Signs of ‘Future Rishi’
Beyond that, the first few signs of ‘Future Rishi’ are starting to emerge. The freezing of income tax thresholds for the basic and higher rate earners, effective from April, is austerity coming over the horizon. Despite supporting the Clap for Heroes campaign, the Government granted NHS staff a 1% pay rise for FY22, which is less than the 2.2% year-on-year inflation. Having starved our public services to the bone, the Conservatives are being forced to raise taxes instead of cutting spending. The net effect, though, is the same; economic growth will be stifled before it can ever really start with the middle and lower income earners paying more proportion of their incomes until 2026 and beyond.
As a government, saving the economy in a recession is like kindling a fire. To begin with, it needs lots of support – airflow, ample fuel etc. – then once it’s burning on its own, you can begin to benefit from the heat coming off. If, every time the fire catches light, you immediately relax and withdraw support, the fire will never stay lit for long. You’ll end up sacrificing more energy restarting the fire continually than if you just helped it reach a sustainable level. Whether the influence of ‘Future Rishi’ will be postponed long enough to get the fire going is, at this point, unclear.
Future tax rises, such as the increase in Corporation Tax scheduled for 2023, are economically sensible, albeit politically difficult. Other tax increases will probably be necessary, especially if growth rebounds more slowly than forecasted. So far, Sunak has neglected to use future tax policy to fundamentally reshape the economy. The Budget also did not mention substantial plans to further the green economy such as by imposing carbon tax or using green spending plans as a way to turbo-charge the economy. Moreover, there is also no implementation of online sales tax (i.e. “Amazon tax”) as a way to level the playing field for brick and mortar retailers. Sunak’s showy and expensive policy of subsidising business investment via a ‘super deduction’ on their tax bill, seems a clear example of trying to get companies on side in the face of coming tax rises. The deduction is a giveaway to big businesses that would otherwise have made capital investments with or without the deduction.
Areas for Labour to hold the Tories to account
Again, with all these policies there’s a trade-off for Sunak between the political cycle and the business cycle. Labour needs to hold him to account whenever he lets his own political career distract from the economic needs of the nation. With low interest rates, the future burden of tax increases can be reduced by spending now, since investments such as green energy provide economic returns over time, boosting tax receipts. The Financial Times has predicted revisions to the spending and tax plans in the Autumn Statement; Labour needs to ensure that Sunak is upfront with the British public on the budgetary plans before autumn.
The National Audit Office estimates that 25 councils in England (7.5%) are at a high or acute risk of financial failure. This is something the Budget does precious little to address given the fiscal capacity of local governments depends so heavily on an economic recovery and the ongoing policy tensions over the lack of adequate devolution of powers.
Other areas which the Budget could have addressed include: a) further support for the night-time economy (contributed £66b yearly income and at least 8% of the UK’s employment in 2019 according to the Night Time Industries Association), in particular as clubs have been shut since the start of the pandemic in March 2020; b) re-considering the £2m business rates holiday rate cap as it will have negligible impact on businesses with large brick-and-mortar footprint; c) focusing on providing more supply of affordable and sustainable housing rather than propping up demand via stamp duty holiday and the Help to Buy scheme amongst others.
In all, this Budget gets a passing grade. The rhetoric of austerity, if perhaps not the underlying mentality, is gone and Sunak has also tossed many dubious Conservative economic ideas into the rubbish bin. Osborne’s incredible claim, contrary to essentially every independent economic voice, that his 2012 Corporation Tax cut raised revenue seems well and truly debunked. Likewise, the idea that the government should focus on reassuring markets through Budget cuts rather than stimulating the economy through spending, also seems to have been abandoned at last by the Conservative Party leadership. Whether Sunak will stamp out growth as soon as it emerges in favour of balancing the books, we’re yet to see.
This post was co-authored by Chris Wongsosaputro, Co-Chair of the Young Fabian Economy and Finance Network (YF E&F Network), Matthew Oulton, Secretary of the YF E&F Network, Dominic Shaw, Vice-Chair and Finance Lead of the YF E&F Network, Nick Trickett, Energy and International Economist of the YF E&F Network and Emily Batchelor, former Women’s Officer of the Young Fabians.
You can also listen to their podcast ‘Breaking Down the Budget’ on Young Fabians Podcast channel on Spotify here
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