Against the challenging backdrop of the coronavirus outbreak and recent market turmoil, newly appointed Chancellor Rishi Sunak today delivered the first budget of this new Conservative administration.
In a confident performance in the House of Commons, Mr. Sunak delivered a speech of two halves – the first part necessarily written in recent days and focusing on mitigating the economic impact of the coronavirus outbreak, the second part delivering on the promises contained in the Conservative election manifesto.
The scale of the challenge facing the UK economy this year was apparent this morning with the emergency interest rate cut announced by the Bank of England before the markets opened. In a press conference shortly after the announcement, Mark Carney confirmed that the move had been coordinated with the Treasury ahead of the Budget.
But that monetary policy intervention looked like relatively small beer as the Chancellor announced a £30bn support package in an urgent attempt to prevent the UK economy tipping into recession. Mr. Sunak warned a sombre House of Commons that the productive capacity of the economy was likely to shrink, given that up to a fifth of the working age population may be off work at any given time.
He pledged that Statutory Sick Pay (SSP) would be available for “all those who are advised to self-isolate”, even if they had not displayed symptoms. For businesses with fewer than 250 employees the costs of providing SSP would be covered by the government in full, while those in receipt of in-work benefits who get ill would be able to “claim from day one instead of day eight”. A £500m “hardship fund” will be given to local authorities to help vulnerable people in their area.
In order to protect businesses from a reduction in footfall, Mr. Sunak announced that any eligible retail, leisure or hospitality business with a rateable value below £51,000 will, over the next financial year, pay no business rates whatsoever. The Government would provide business interruption loan schemes up to £1.2m for SMEs, providing cover for up to 80% of losses. More remarkably, perhaps, Mr. Sunak announced a £3000 cash grant for any business currently claiming small business relief.
Setting the framework ahead of a blizzard of announcements in the Budget speech, the Chancellor said that £175bn would be invested in Britain’s infrastructure over the next five years, including on road projects, rail and broadband. Conservative MPs cheered this Keynesian spending splurge, which Mr. Sunak said would boost overall economic growth by 0.5%, while Labour MPs looked on, stunned and confused by this departure from Conservative orthodoxy.
The Chancellor argued that the fiscal rules set out in the manifesto would be kept “for now”, although he added that the “fiscal framework” would be reviewed in a further budget to be delivered in the autumn. Given the scale of borrowing and spending announced today, it would be little surprise to see these revised later this year.
The Office for Budget Responsibility (OBR) described today’s Budget as the largest sustained fiscal boost for nearly 30 years and some commentators are already asking where the money will come from. By the end of the Parliament, day to day spending on public services is expected to be £100bn higher in real cash terms than it is today. Some may try and portray this as just a return to the pre-austerity status quo, but the economic and political importance of today’s budget cannot be overstated.
The Chancellor announced that investment in R&D would be increased to £22bn a year, with detailed allocations set out in the forthcoming Spending Review. Yet some money was earmarked today for projects long championed by the Prime Minister’s chief adviser Dominic Cummings: a science institute, research into space and nuclear fuels and at least £800m going to a “blue skies research agency”.
On National Insurance, the Chancellor confirmed an increase in thresholds, providing an effective tax cut (albeit a small one) for millions of voters. He said that he had concluded a review into Entrepreneurs’ Relief which he described as “expensive, ineffective and unfair”, and announced a reduction in the lifetime limit from £10m to £1m. He sought to tackle the senior doctors’ pensions issue by raising the taper threshold from £110,000 to £200,000, but in doing so effectively handed a tax cut to a number of higher paid employees, including many not working in the health service.
Mr. Sunak announced a freeze in alcohol duties and a package of support for pubs and the Scotch Whisky industry. To the relief of many Conservative MPs he also chose to freeze fuel duty, a move that will draw criticism from environmental campaigners.
For although there were measures on plastic packaging and a climate change levy on tax, there was little in today’s budget that suggested the Government has truly begun to grapple with the economic transformation needed as we embark the UK’s journey to net zero by 2050. The government will argue that that will come later in the year and that the priority for today was to take early action to minimise the impact of coronavirus on the economy. Yet in government there is rarely the breathing space to tackle one issue at a time. Coronavirus, climate change and negotiating a new UK/EU trade relationship are all priorities and finding the bandwidth to deal with them all, will be a real test for the government in the months to come.
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