The Chancellor giveth, and the Chancellor taketh away. Today, Rishi Sunak combined significant short-term support as the economy moves out of lockdown with plans to start tackling the unsustainable fiscal position later in the parliament. In doing so, he began to set the political battle lines for when the politics of deficits and debt make a comeback heading towards the next election.
With the run-up to the Budget dominated by headlines about the Chancellor levelling with the British people about how he would approach repairing the Covid-ravaged public finances, it would be easy to lose sight of the fact that this was still squarely a rescue Budget. Sunak announced a further £60bn of support for the economy over this year and next. A Biden-busting Budget this was not, but while it doesn’t match the proportions seen across the Atlantic or indeed the eye-watering nature of the support provided over the last year in the UK, it is still very generous by historic standards. Much bigger as a share of the economy, for example, than the stimulus unleashed by Alastair Darling during the financial crisis.
The Chancellor extended many of the existing support packages—from the furlough scheme to various tax cuts—broadly corresponding to the government’s timetable for bringing the economy out of lockdown, though in most cases with a few months’ extra buffer, and with tapering to avoid cliff edges so businesses have time to adjust. That is the right call: the cost of causing a bigger-than-needed spike in job losses by ending furlough too soon looks much higher than the cost of keeping it going for an extra couple of months. The Chancellor also announced a significant package of support to get the economy back to operating at capacity and to ease adjustment to the new post-Covid normal as these existing schemes wind down, with a package of measures on the labour market and a big new temporary tax allowance to stimulate business investment.
But look beyond the big short-term support, and the much-trailed difficult decisions begin to bite. Support of £60bn next year is replaced by a fiscal tightening of £30bn by 2025-26, with a big increase in corporation tax and freezes to personal tax thresholds doing all the heavy lifting. The tax rises don’t kick in properly until April 2023, however, putting to bed the pre-Budget hysteria that the Chancellor would instigate major tax rises in the midst of a crisis.
A combination of at least some economic scarring from Covid, combined with pressures to spend in the medium term to deal with things like the enormous backlog in the NHS, mean that significant action will be needed to get the public finances back on a sustainable path. Raising tax is hard, particularly for Tory chancellors, so Sunak was right to seize this political opportunity to do so: passage through the House of Commons can be smoothed by pointing out the vast array of short-term giveaways.
The good news for the Chancellor is that the Office for Budget Responsibility, the government’s independent economic forecaster, provided support for his approach, with the projection of a much faster and stronger recovery than anticipated in its November forecast. The UK economy is now forecast to be back to its pre-Covid size by the middle of next year. There is still huge uncertainty, but if that outlook holds, then the Chancellor may be spared as many tough measures on tax and spend in the in the future as previously feared.
There is also a strong party political logic to the Chancellor’s decision to begin setting out a path to fiscal sustainability. Covid has driven the politics of debt right back up the agenda in the minds of voters, who are much less relaxed than the economics profession about sky-high borrowing. Sunak showing he is willing to take tough decisions to tackle that problem will likely pay off in the medium term.
It also shifts the debate onto difficult ground for Labour. The public’s deeply engrained lack of trust in Labour to manage the public finances infects the party’s entire brand, and makes it nigh on impossible for it to be seen as economically competent. Yet, through a combination of internal party politics and ideology, Labour is boxed in by an inability to take a position that makes it look tough on fiscal profligacy. The mess it has got itself into over whether or not to oppose the corporation tax rises shows this is fertile ground for the Tories to plough.
That said, the short-term politics may still be painful for the Chancellor. There is a reason big tax-raising Budgets by Tory chancellors don’t come along very often. The backlash from Tory backbenchers and the right-wing press can be brutal. Sunak will hope that the extensive pitchrolling he has done to signal what his plans are will mean that he has softened both up sufficiently to see off any immediate political danger. His own strong personal approval ratings may help too.
But as with all Budgets, we won’t know whether the Chancellor has safely navigated through for a few days yet. If he gets to Sunday without the newspapers or the party rank-and-file having stirred into any type of rebellion, it should be job done.
