This is one of the hardest budgets to predict of recent times because the range of possible economic scenarios for the rest of the year is itself so wide. And, unlike some of his predecessors, the Chancellor has floated nothing of significance. But the ink must be nearly dry. Today, the OBR will start its work on assessing the soundness of the proposals. The rest of us have another week to wait.
The Chancellor’s immediate challenge is to work out for how long he needs to maintain support for business to prevent the economy from toppling off a cliff. My hope is that he will maintain furlough and most other schemes through most of the year. The economy may be a coiled spring but there remains a real risk of recession and damage to the underlying capacity of the economy from early withdrawal of support. This is a risk the Chancellor does not need to take this year. His capacity to raise debt remains strong and its cost is at a historic low.
That said, he needs to reduce the deficit at some point which will have to involve both cuts to expenditure and increases in some taxes. Deciding when and how to do this is one of the most difficult challenges in Government. History suggests that he should wait until the recovery is well established. The austerity measures that followed the financial crisis did not get fully into gear until 2011. But the question of when to start tackling the deficit is about politics as much as economics. Fostering economic recovery may suggest leaving the tough measures for a couple of years but that means they will be hitting our wallets just as a General Election looms into view.
Cutting spending in the short term will in any event be hard going. The NHS has a backlog of non-COVID treatment to provide. The railways and other parts of our transport system are in financial meltdown. And the political will to make cuts is not there, as evidenced by the row over the extension of universal credit.
Increasing taxes is no easier than cutting expenditure. There is a 2019 manifesto commitment not to do so, which will need to be worked round. To get significant amounts of extra revenue, the Chancellor will need to look at the big revenue earners; VAT, Income Tax and National Insurance. Increases in these upset almost everyone. Increases in more specific taxes, such as fuel duty, may win some support but they also provoke some noisy lobbies and earn less revenue.
So, what do we hope to hear about the medium to long term plan for recovery and debt reduction. Businesses need to see significant investment by the Government to support the economic recovery so that the eventual need to reduce the National Debt will be easier to afford and less painful. But that investment must be focused on generating a sustainable upward shift in the capacity of the economy to grow. This will only be achieved by increasing productivity through investment in skills, innovation and infrastructure, and meeting net zero targets. All of these measures are in earlier commitments made by Government. Now we need the details of the plan - the road map. And once we have the details, the Government must stick to the map. Too often the private sector has adjusted business models in response to policy, only to have the rug pulled out from beneath them. Certainty is needed from the Chancellor so that business can invest with confidence. That is a big ask in such uncertain times, but without it we will limp, not spring, forward.
Published 24 Feb 2021