On 23rd February Onward hosted a pre-Budget briefing, exploring the Chancellor’s economic choices, political priorities and the economic agenda of this parliament.
The event was chaired by Onward’s Will Tanner. The panel included Lizzy Burden, UK Economy Reporter at Bloomberg; David Gauke, Former Secretary of State for Work and Pensions and Rupert Harrison, Chair of the Council of Economic Advisers to George Osbourne.
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Summary of discussion
The discussion revolved around the challenges facing the Chancellor of the Exchequer, Rishi Sunak, ahead of the Spring Budget 2021 on 3rd March. As the Chancellor attempts to steer an economy that has been ravaged by the Covid-19 pandemic, the panel explored his options for providing sufficient support to those worst-affected while limiting the deficit. Key questions included how support can be bridged up to the end of the year, when the process of balancing the books can begin, and what tools will be necessary to address public finances both in the short and long-term future.
In his opening remarks, Rupert Harrison discussed the possibility of a post-lockdown economic bounceback, reiterating Andy Haldane’s description of the economy as “like a coiled spring”. With fewer options for spending reductions under current restrictions, he noted that the UK’s rising average savings rates will likely result in higher levels of consumer spending once service sectors reopen.
However, he also pointed out that the pandemic has caused permanent damage which creates a need for reallocation towards those who have lost their jobs, though the UK has a strong track record on job creation. Rupert cited the key challenge for the Chancellor as being the need to marry continued support through the short termwith a robust fiscal plan for the long term. Although the furlough scheme should be brought to an end relatively soon, he stressed the need for a gradual phasing out to avoid a spike in unemployment. Further, Rupert noted how the UK benefits from having relatively long-term maturity bonds compared to many other comparable economies. This allows more time to finance debts and manage the public finances in the event of rising interest rates.
He noted that the Chancellor is likely to have find around £40bn in additional revenue. As such, he regards the short-term priority to be maintaining fiscal support to “smooth over the permanent damage”, which he expects to be covered by a combination of taxes rises. He raised the prospect of hiking corporation tax to 23-24%,freezing personal allowances as well as potentially a new online sales tax, and argued that the Chancellor should also consider some changes to inheritance reliefs.
During the Q&A discussion, Rupert said the government will be reluctant to provide sector-specific support as the furlough scheme is phased out. As for Universal Credit, he argued the most politically sensible option would be to freeze the uplift in cash terms, allowing fiscal drag to reduce it over time. In terms of the distribution of the recovery, Rupert underlined the opportunities to address long-standing inequalities created by changing work models. Given the rise of remote working and high house prices in London, he argued that new growth strategies will arise in other areas that could amount to “a big shakeout in economic geography”. Finally, in response to a question on the intended message ahead of the next election, Rupert argued that Sunak wants to be seen as fiscally careful and that “the Conservatives will always run on being a responsible steward of the economy”.
Lizzy Burden began by declaring two unknowns that characterise the uncertainty of the current economic situation: the number of jobs that will be lost once the furlough scheme ends, and the degree of consumer spending that will ensue post-lockdown. She agreed that the furlough scheme is likely to be extended and gradually phased out, and raised questions over an extension to the stamp duty holiday and the £20-a-week Universal Credit uplift. Voicing concern over the budget deficit, she called for coordinated government action that provides clarity for businesses. Lizzy remarked that tax rises are unlikely to arise until the Autumn, and flagged corporation tax and fuel duty as feasible options for raising revenues.
In the following discussion, Lizzy agreed with the potential benefits of rebalancing the economy but noted that London has experienced the highest job losses from the pandemic. She said that the Chancellor is a proponent of the climate agenda and questioned the utility of raising fuel duty amid growing electric vehicle ownership. Last, she reaffirmed that the deficit will likely be addressed through a combination of smaller taxes rather than a few big rises, and said that corporation tax is “a politically easy place to start”.
David Gauke framed the Chancellor’s challenge as being separated between the short-term, medium-term and long-term. In the immediate term, the Chancellor should support businesses out of lockdown through a furlough extension and business rates reliefs. In the medium term, he should set a a path for departing from sectoral support post-lockdown. In the long term, the priority will be the long-term state of public finances.
He emphasised the lack of urgency to tackle public finances and stated that at this stage it makes more sense to set out a plan for fiscal consolidation to begin next year. As for the Chancellor’s options for raising money, David accepted that corporation tax is likely to be targeted, although he expressed concern over the economic efficiency of such an approach, claiming that it is “essentially a tax on investment returns”. He also noted that higher corporation tax could be introduced in tandem with a temporary uplift in capital allowances. David also considered the possibility of mobilising funds through smaller taxes such as excessive profits and online sales taxes, but believed that the government must ultimately employ the “big levers” to generate sufficient revenues in the long-term to “plug the hole”. Despite rises to VAT and income tax being ruled out by the Conservatives during the 2019 election campaign, David argued that the circumstances have changed so dramatically so as to justify contravening the manifesto.
On the question of how support can be bridged up to the end of 2021, David raised doubts over providing assistance on a sector-by-sector basis. This was due to the likelihood that consumer demands will differ in post-lockdown Britain, and employer markets must reflect new consumer preferences. As for the distribution of the recovery, David stressed the need for a long-term approach with a focus on infrastructure and skills, to “ensure that the whole country can grow”. Regarding Sunak’s stance on the climate agenda, David trusted that the Chancellor “wants to own it” and could even end the freeze on fuel duty, though acknowledged that this would be a politically fraught move. Last, David agreed with his co-panellists by observing that Rishi Sunak will seek to send a message that paints the Conservatives as fiscally cautious ahead of the next election.
The discussion was streamed live through Zoom and Twitter, attracting an audience of 122 people live and 2400 people have visited the twitter livestream. The full recording is available on our YouTube channel here [LINK] and embedded below.
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