Rishi Sunak’s Budget demonstrated the ruthless capacity for adaptation that has kept his Conservative party in office for so much of the past century. The youthful chancellor delivered not just an end to austerity. He marked a shift from the low-tax, low-spending Conservatism of Margaret Thatcher towards a new rightwing model, embracing higher spending funded by borrowing. The goal of returning national debt to levels seen before the financial crisis has been jettisoned. It is surely a performance that will have pleased Prime Minister Boris Johnson, eager to set himself apart from his immediate predecessors and demonstrate that he is listening to newly-acquired Tory voters in the Midlands and northern England.
This was, too, a budget of its time, delivered in the midst of a developing national emergency. Addressing the challenge of coronavirus, Mr Sunak sought to portray an image of calm competence. The focus on targeted support to counter disruption to business from the epidemic is the right one. The £30bn programme of fiscal stimulus included £12bn of virus mitigation measures: tax breaks for small hospitality and leisure businesses, support for the National Health Service and a pledge that the government will pick up the bill for statutory sick pay. Careful co-ordination with the Bank of England, which cut rates by 50 basis points earlier in the day and launched a scheme to fund loans to small business, provided a reassuring demonstration that the government was determined to act.
The priority for now must be to help households and viable companies to weather the epidemic, preserving jobs and capacity so the economy can quickly rebound. Given the uncertainty over how severe the impact may become, businesses will welcome the echoes of former ECB president Mario Draghi’s pledge to “do whatever it takes” to support them. The chancellor was right to hold back from measures to stimulate spending when many consumers will be confined to their homes. General stimulus measures, such as temporarily cutting value added tax to encourage spending, may be needed in the Autumn Budget.
Coronavirus is far from the only headwind facing the economy. Though Mr Sunak only briefly mentioned Brexit, adjusting to new trade barriers with the EU is another sizeable challenge. Borrowing and spending to offset the impact of these shocks is sensible.
This was also the right Budget for the moment in its broader willingness to seize the opportunity provided by low interest rates to invest in delivering the government’s central promise to “level up” UK regions. Increases in day-to-day public spending and infrastructure projects over the next five years will be largely funded by debt. The fiscal loosening will represent the biggest debt-financed spending spree under any chancellor since Norman Lamont in the 1990s. Investment in roads, rail, housing, broadband and capital projects as a proportion of the economy will rise to levels not seen since the 1970s.
This bold approach is warranted, even if it remains unclear to what extent it can truly deliver the kind of productivity boost the chancellor promised, or heal the UK’s deep regional divides. Much will depend on how the funds are spent.
Mr Sunak has made a decisive break with the approach to the public finances of the past decade. Instead of a focus on lowering borrowing, debt as a percentage of national income will remain roughly stable over the lifetime of this parliament, once the coronavirus-related measures announced are taken into account. From a macroeconomic perspective, this brings the austerity years to an end: government tax and spending will now boost growth rather than acting as a drag.
This is not, however, the kind of Budget the chancellor can expect to deliver every year. Mr Sunak will in future need to spell out how he intends to finance public services in an economy with low growth and an ageing population. Beyond a few small measures, announcements on tax were notable by their absence. The chancellor declined to end the decade-long freeze on fuel duty, and excluded the largest sector, farming, from a move to end subsidies on red diesel. The opportunity to take advantage of the Conservatives’ majority to signal a direction for future tax increases was ducked.
The chancellor left some difficult questions about how to fund the UK state over the long term unanswered. He barely tackled the much-needed reform of adult social care. The government’s spending review and second Budget later this year give Mr Sunak two more opportunities to set out a broader strategy and framework. He should seize them. For now, facing the coronavirus crisis and the uncertainties of life post-Brexit, his Budget did what it needed to do.
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