March Macroeconomic Update

This update was co-authored by Chris Wongsosaputro, Chief Macroeconomist of the Young Fabian Economy and Finance Network and Amarvir Singh-Bal, The Secretary of the Economy and Finance Network and lead of the Economic Update Team.


The Young Fabians overview of The Chancellors Budget

UK chancellors have traditionally faced a trade-off between a desire to deliver “giveaway” Budgets while wishing to be seen as fiscally prudent. But against a backdrop of record-low borrowing costs and potentially severe economic disruption from the spread of coronavirus, the government’s objective to “level-up” underperforming regions presented Chancellor Rishi Sunak with an opportunity to throw fiscal caution to the wind.

The Budget scorecard shows a net fiscal loosening (accounted for entirely by extra spending, split roughly 50-50 between current and capital) of £175bn over the five years from 2020-21, rising from £18bn (0.8% of GDP) in the current fiscal year to just over £40bn (1.6% of GDP) in 2024-25. This amounts to the biggest sustained fiscal loosening since the pre-election Budget of March 1992.

Granted, there was a certain amount of sleight-of-hand. A chunk of this year’s increase relates to the rise in day-to-day government spending already announced by the Chancellor’s predecessor, Sajid Javid, in last September’s Spending Round. Changes to the fiscal treatment of what were formerly EU budget contributions also flattered the numbers. But the Budget scorecard does not include a temporary £12bn of spending and tax cuts this year to alleviate economic disruption from coronavirus (encompassing more resources for the NHS, underpinning statutory sick pay for workers, and providing cash injections and tax holidays for small firms). This takes the total fiscal stimulus in 2020-2021 to £30bn or 1.5% of GDP, similar in scale to the package of fiscal support announced in 2009-2010, just after the financial crisis.

Nevertheless, the key takeaways from the New Chancellor include:

  • A commitment to spend an additional £203 billion to spending over six years while raising £28 billion in taxes – an astounding difference of £175 billion
  • Freeze in the corporation tax rate, which now needs to be followed by a Budget Resolution by 31 March to avoid the two-percentage point cut in rate coming into effect on 1 April 
  • The Government’s economic response to COVID-19 is threefold: 
    1. Support for the National Health Service
    2. Support for individuals
    3. Support for business 

Any crowd pleasers?

  • The freeze on fuel duty retained for another year
  • A freeze on all alcohol duties
  • The abolition of VAT on female sanitary products once the UK is beyond the Brexit Transition Period
  • The abolition of VAT on e-publications from 1 December

Total exchequer impact of Spring Budget 2020 policy decisions

Treasury scorecard of policy decisions (sum of 2019-20 to 2024-25) 

Key takeaways

Measures announced in the Budget to support the economy will reinforce earlier action taken by the BoE–the fiscal/monetary coordination implies more potent macro policy. But the near-term effect of that potency will be to reduce downside risks rather than to provide a spur to the economy.

The UK Budget included an extra £12bn of coronavirus-related borrowing this year, contributing to the largest sustained fiscal loosening since 1992. We estimate that this should raise the level of GDP by around 1ppt by 2022-23.

The OBR’s forecast shows the Chancellor meeting his current balanced budget rule. But, as the forecast captures neither the potential economic hit from corona virus nor the proposed policy response, it is already out of date.

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