Sunak must support the economy now and make us pay for it later Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. It is worth remembering, as we await Wednesday’s budget, that it was not supposed to be like this. A few months ago, Rishi Sunak, basking in the warm glow of his Eat Out to Help Out scheme in August, was looking forward to presenting his second budget in November. By then, the Treasury hoped, Covid-19 would be in retreat, and the spring 2020 national lockdown would be a fading memory, and it would be time to embark on the task of paying for the pandemic. Things have turned out differently. Two more lockdowns have happened and the current one is not over and
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Sunak must support the economy now and make us pay for it later
My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt.
It is worth remembering, as we await Wednesday’s budget, that it was not supposed to be like this. A few months ago, Rishi Sunak, basking in the warm glow of his Eat Out to Help Out scheme in August, was looking forward to presenting his second budget in November. By then, the Treasury hoped, Covid-19 would be in retreat, and the spring 2020 national lockdown would be a fading memory, and it would be time to embark on the task of paying for the pandemic.
Things have turned out differently. Two more lockdowns have happened and the current one is not over and will not be by the time of this week’s delayed budget. Eat Out to Help Out is viewed a little differently these days, though there is talk of a re-run.
This will not, either, be the budget that the Treasury had in mind for last November, for which we may have to wait until November this year.
The delay, however, has been no bad thing. The last update from the Office for Budget Responsibility (OBR), in November, predicted a budget deficit this year, 2020-21, of £394 billion. With two months of the fiscal year to go, the running total is £271 billion. By now, the OBR thought it would be a shade under £340 billion.
There is a complication, in that the OBR is expecting a £29.5 billion write-off of the government’s Covid-19 business loans which do not feature in the monthly figures. Even so, it will be a disappointment if this year’s deficit does not come in below £350 billion, still clearly a massive number, but probably £50 billion – a sizeable budget deficit in a normal year – below what was feared even a few weeks ago.
The other positive, of course, is that the vaccine rollout and the government’s roadmap for the easing of restrictions offers the prospect of a really strong recovery. The Bank of England is not at the top end of economists’ expectations but its latest forecast, published early this month, provides an insight of what we might expect.
In the second quarter, April-June, it expects a rise in real gross domestic product (GDP) of more than 5 per cent, followed by an increase of nearly 5 per cent in the third quarter. To put these in perspective, they would represent the second and third biggest quarterly increases in GDP on record, the biggest (16 per cent) having been in the third quarter of last year. They will also translate into some spectacular year-on-year gains. Second quarter annual growth will be around 18 per cent.
All this is likely, but not guaranteed. We do not yet know if the coronavirus has anything more t throw at us. And, while the GDP statistics point to a very robust growth, for businesses in many sectors it will feel like blearily stepping out into the sunlight and it will take time to adjust.
That is why, looking at all the things that have been said and written in the run-up to this budget, it looks to me very much like a case of continued short-term support for the economy, combined with the beginning of a plan for medium-term fiscal consolidation, in other words tackling the budget deficit.
Some of that short-term support seems very well-judged. It makes sense to persist with the furlough scheme beyond the end of April, and indeed until restrictions are lifted, as with business rate relief. It makes sense too to continue with the VAT reduction for hospitality for now, even if people may not need much encouragement to hit pubs, cafes and restaurants when they are allowed to.
There is less of an argument for extending the stamp duty reduction beyond March 31, given the strong revival in the housing market in recent months. Sunak appears to have decided that a cliff-edge tax increase while the economy is still operating under restrictions is not a good idea, so the new deadline will be the end of June.
He may find that he faces a backlash against increasing it even then. Temporary tax cuts have a habit of becoming permanent.
That leaves the question of tax increases, and the timing of them, on which I wrote last week. The most obvious here is the widely mooted increase in corporation tax. When the Treasury let it be down it was considering that last summer, the talk was of an increase, over time, from 19 to 24 per cent. More recently, two versions have emerged, with end goals of either 23 or 25 per cent, with the additional suggestion of an announcement now but implementation in the autumn. That leaves open the question of whether the first percentage point increase will come in 2021-22 or 2022-23.
Interestingly, Lord Wolfson, chief executive of Next, said the other day that higher corporation tax was a reasonable price to pay for the government huge support during the pandemic.
Every percentage point increase in corporation tax raises around £3 billion, according to the government’s latest tax ready reckoner, published last month. Four increases would net around £12 billion, not that much for losing a reputation as a very low business tax country, and only a fifth of the £60 billion of tax increases the Institute for Fiscal Studies thinks will be needed over the medium term to stabilise the public finances. Those will be for later.
A pandemic budget – even if the route out is now clearer is not the time for decisions that will constrain the government in future. Sunak had hoped by now to unveil a new set of fiscal rules, partly to reflect the government’s infrastructure investment priorities, but the word is that there is still too much uncertainty to do that now. Once again, the Treasury is looking towards a November budget.
There is also a question of whether the chancellor wants to be remembered as a reformer, or just as somebody who stepped in with a very large chequebook when the chips were down for the economy.
There is a lot to be done. Andrew Sentance, an adviser to Cambridge Econometrics, in a blog for the firm says that the government’s green recovery plan needs beefing up. Britain is hosting the Cop-26 climate conference later this year.
There is scope for tax reform across a range of areas, including property taxation – taking in now delayed decisions on reforming business rates – and stamp duty, described by the IFS as a “particularly damaging tax”, which should be abolished. Sentance also suggests that Brexit offers scope for reforming VAT in a way that better reflects UK priorities.
We shall see, and we will probably have to wait. For now, Sunak has not finished firefighting the pandemic. He has provided a lot of support, and a further £55 billion is earmarked for the 2021-22 fiscal year, starting in April. Continued support now, pay for it later, has to be the message.