Autumn budget expert Q&A; ‘Rishi Sunak is gambling that economic recovery is genuine’October 28, 2021
Chancellor Rishi Sunak’s autumn budget and three-year spending review looks pivotal for the UK, coming amid shortages, rising prices and yet another COVID surge. With a general election due in the next couple of years, all eyes are on how the chancellor reconciles his strong desire to balance the nation’s books with the fact that many people are getting poorer and levelling up still looks more like a slogan than a commitment.
The Treasury’s answer has been to pre-announce more budget measures than ever before. For example, the minimum wage is to rise by 7% to £9.50; the year-long freeze in public-sector pay is ending; and there will be £6 billion to help tackle NHS waiting lists, and £7 billion for buses and trains outside of London.
We asked finance and economy specialist Steve Schifferes of City, University of London to offer his views on what it all means.
How do you see the context for this budget?
In broad terms the Chancellor has already boxed himself in. His over-arching aim remains to get the current budget deficit down to zero by the end of the parliament – which will require both limits on spending and tax rises. He has already announced both tax increases and the overall spending totals for the spending review – and agreed to spend 60% of it on the health service, education and defence. So what’s left is never going to go very far, especially when health is 40% of total department spending. According to the Institute for Fiscal Studies, annual departmental spending is set to be £14 billion to £17 billion less than pre-COVID by 2022, with most of it falling outside those three protected departments.
Meanwhile, his big tax increases, both in the March budget – notably corporation tax and the freeze on personal income tax allowances – and then increasing national insurance contributions in September to pay for the health and social care levy, will raise the British tax burden to the highest level in 70 years. So there is little scope for any further increase in taxation to help cut the deficit, especially ahead of a general election.
Despite the tax increases, his plans to get the deficit down so quickly is extremely challenging. It took ten years of austerity for the two previous Tory chancellors to cut the much smaller deficit after the financial crisis. Sunak will have to rely on strong economic growth, which will boost tax revenues to reach his goal.
What about all the spending commitments in the pre-announcements?
The answer is that there is less to most of them than meets the eye. Chancellors are adept at either re-announcing previously agreed spending plans (such as the bulk of Sunak’s regional public transport spending) or bigging up small announcements without the context (for example, 70 new family centres around the UK are no substitute for the 1,000 child care centres closed in the last decade). And the highly publicised increases in the minimum wage and public sector pay will respectively be paid for by employers and by the public sector, through other cuts or savings in their already fixed departmental budgets.
Many of the big numbers in the pre-announcements are really long-term capital spending that will take years to come to fruition. For example, the government will buy new diagnostic machines but won’t hire additional staff to operate them. Similarly, Sunak has refused to provide free school meals and will not restore the pandemic rise in universal credit because they fall into the category of current spending.
Finally, there are likely to be a range of stealth taxes and hidden charges to compensate for any extra spending – such as higher repayments for student loans, and increases in council tax to pay for social care, where the public might blame local politicians rather than the government.
What could derail the budget?
The big uncertainty is the economy. In 2020 we saw the worst decline in the economy in living memory. This was followed by one of the fastest bounce-backs as COVID restrictions were lifted, though since then, there have been signs of things slowing down again. The key question is whether it is a short-lived rebound or a sustained recovery. There is also uncertainty as to whether the sharp rise in the cost of living will lead to a permanent rise in inflation, as the Bank of England fears.
The chancellor is of the view that the economy will do pretty well on its own, despite the sharp contraction in government spending. The big danger is that higher inflation could wipe out any rise in living standards from his budget measures.
In the longer term, only an increase in productivity can ensure everyone’s standard of living will rise. This problem has bedevilled British governments for decades, and the modest measures Sunak has introduced so far are unlikely to make much of a difference. The government wants to see a high-wage economy, but this could just translate into higher prices unless companies invest more. The big tax increases on companies will discourage such investment, as will the tendency of the governemnt to blame all its economic problems on business.
What about levelling up and the green agenda?
While the chancellor is paying lip service to the government’s overall aim of levelling up, he is not committing anywhere near the sums that would reverse decades of decline for northern cities. A useful comparison may be the estimated €2 trillion (£1.7 trillion) that Germany spent on reunification to reduce the gap between East and West Germany.
Sunak has also resisted committing substantial government funds to pay for the green transition. He seems to be content to leave it to the private sector and consumers to pay for the transition – for example, with electricity bills being raised substantially to pay for the cost of buiilding new nuclear power stations.
While the budget may give the chancellor some short-term political benefits, putting off the big decisions could be costly in the long run.
This article was originally posted on Autumn budget expert Q&A; ‘Rishi Sunak is gambling that economic recovery is genuine’