Looking ahead to next week’s Budget, WA has set out some of the hidden messages business can expect to find in the Chancellor’s statement.
This is a critical juncture for the Chancellor, HM Treasury and the wider government. As we emerge from the most damaging economic period of the past 100 years, the decisions taken now have to be finely balanced between continuing the essential life support for the economy, stimulating as fast as possible return to growth, whilst trying to avoid long term damage to the government’s balance sheet.
The biggest fear weighing on HMT will be that the immense levels of spending we have seen in the last year become entrenched permanent features of policy. This could happen in a combination of three ways:
- A slow-down in vaccine take-up and/or new variants causing worrying spikes in cases, once again increasing pressure on the NHS and creating a need for further lockdowns later in the year; this is also of concern to No 10 as the Prime Minister has repeatedly stated that this has to be the final lockdown.
- Financial support measures are extended again and again so that the public simply expects them to exist as a default (11 years of fuel duty freezes being a cautionary example), with calls for long term extensions to furlough a major danger area;
- Huge levels of unemployment with millions of workers moving permanently into the welfare system – reducing both the government’s tax take and increasing the overall burden on the state’s coffers. With latest data showing unemployment at 5.1% (1.7m) and with around 6.4m jobs being supported by the furlough scheme, HMT will be expecting this to shoot up rapidly.
With these fears front of mind, and with parts of a fractious Conservative parliamentary party uncomfortable with the free-spending Johnsonian approach, here are the three hidden messages we might expect to see in Rishi Sunak’s budget next week:
1. We are still in economic crisis mode
The Chancellor knows he can’t withdraw support too soon for risk of killing off economic recovery at the outset. We should be expecting to see limited extensions to current support measures, with continuations of the furlough scheme, VAT and Business Rates cuts, the uplift to Universal Credit and the Stamp Duty holiday all looking likely. In each case, these will be presented as temporary and time-limited extensions to see the country through the crisis before a return to “normality” in the Summer.
2. This is still a Conservative government
The government has been forced into levels of spending that would make John McDonnell and Jeremy Corbyn green with envy. They’ve propped up great swathes of industry, nationalised whole sectors, created massive workforce subsidies and expanded welfare provision. Borrowing has risen to £394bn – the highest level since the Second World War – with the government happy to borrow to spend in an era of record low interest rates. Despite this big-government spending spree, the Chancellor will reaffirm his commitment to fiscal responsibility, sending a signal to the hawks on his backbenches that this largesse cannot and will not last forever.
Now is not the time to start the correction, so Sunak needs to buy time to work out where and when to claw back the money that’s been spent. In the meantime, we would suspect totemic Conservative measures remain, with no changes to the triple lock on income tax, national insurance and VAT, and a reaffirmation of the government’s belief in private enterprise and confidence in UK business to provide the growth, innovation, productivity gains and job creation that the economy needs to super-charge recovery.
3. We are yet to see Sunak’s real Budget – that will come in the Autumn
This is not really his agenda. This will be a place-holder Budget which will focus on the limited continuation of Covid support. He will want to showcase the best bits of the government’s emergency response. We will get the intervention highlights reel, celebrating the vaccine success story, providing reassurance that the UK remains a dynamic economy and that the government has the right ideas to get it moving again. It will be important for the Chancellor to emphasise the necessity of high levels of vaccine take-up to avoid a resurgence of the virus later this year.
If that can be avoided, then the Budget this Autumn will be the real reset moment and Sunak’s chance to create his own legacy. If economy is open and functioning, he will have leeway to define his true long term economic plan, establishing his desired approach as Chancellor to modernise the economy. It’s worth remembering that every Chancellor, and especially those that ultimately want to be PM, want and need to create their own legacy in No11. As it stands Sunak can’t yet begin to put his own mark on economic policy, beyond that which has been forced upon him.
While the economy remains closed, frankly, there is nothing to shape.
On the road back to normality
Overall, this Budget can be seen as a staging post on the road back to normality. There is a long way yet to go, and many challenges to be overcome. For businesses planning their government engagement activity for the year ahead, it will pay to consider how you can tune into these considerations, presenting constructive policy solutions that align with the government’s underlying agenda, whilst being highly aware of the tensions that are bubbling away beneath the surface.
by Marc Woolfson, Partner, Head of Public Affairs