Reasons to be cheerful if Sunak can resist the temptation to Tinker
Yesterday’s Budget giveaways were largely possible because of upgrades to UK growth. Back in March the Office for Budget Responsibility (OBR) forecast UK growth of 4% for 2021. Yesterday this was upgraded to 6.5%. This improvement helped reduce estimates for government borrowing by £50bn this year alone. If Rishi Sunak had a skip in his step yesterday, it was this better-than-expected economic backdrop that was responsible.
Almost as encouraging for the Treasury were two further updated assumptions from the OBR. Firstly, the rapid recovery in payroll jobs – now above their pre-COVID level – means less scarring from the COVID-19 recession. In previous recessions the toxic legacy of workers scarred by periods of unemployment has hampered growth for years afterwards. One only needs to remember the persistent unemployment of the 1980s – and the lost generation of workers formerly employed in heavy manufacturing – to see the carnage this creates to communities and local economies. If the furlough scheme has avoided this in the 2020s it will have been a stunningly good use of almost £70billion of public funds. Secondly, the OBR now forecasts growth of 6% for 2022. This suggests that despite the tough winter ahead for many low-income households, the economy will still have momentum as the weather warms and the days lengthen. Growth at this rate next year will mean plenty of job opportunities for those looking to benefit from the reduced Universal Credit taper – the rabbit in yesterday’s Budget hat. Whilst there is some doubt whether the UK economy will maintain this momentum, the first half of 2022 will be compared to a period in 2021 when the UK economy was in various iterations of lockdown. Assuming this can be avoided again, a decent growth rate is relatively straightforward to achieve.
The Chancellor and his team of Treasury Ministers would like this near-term growth momentum to continue even longer. However, by the end of next year the good news starts to run out. By 2023 growth is projected to be back below 2% a year – and stay there. Corporation tax increases and freezes to income tax thresholds for middle income households start to bite. The realities of UK-EU trade frictions resulting from Brexit will be crystallising as transitional arrangements cease.
If all this means that the UK is destined to grow at a long-term average of 1.7% – rather than the 2.2% it has averaged since World War Two – then tax cuts and debt reduction at the same time become a near-impossible task. With an ageing population hungry for increased health spending and pension entitlements, the elixir of renewed productivity growth is the only plausible way to fund these pledges without raising tax rates.
This is where the Chancellor must hope that his investment in adult skills, focused Research & Development spending, reversing the cuts in public services and developing regional growth hubs begins to yield dividends. The OBR is unconvinced, the Bank of England is unconvinced and most independent forecasters are unconvinced. Their scepticism is not because these are the wrong agendas. It is more that they have all been tried in various guises for decades – with mixed success. What must be hoped for is that with a big parliamentary majority behind him, the Chancellor resists the temptation to tinker. The real challenge is to stay the path with these commitments so that private sector businesses – secure in the knowledge that the government is not about to pull the rug from underneath them – can “crowd-in” much needed investment. The other area where the Chancellor can make a big impact is to be a stable and consistent voice championing business and innovation in the Cabinet. Recent macroeconomic communications from the government to business on inflation, wages, competition policy and international co-operation have been sporadic at best, shambolic at worst. If Rishi Sunak is going to use this Budget as a launchpad for the top job in politics, correcting these missteps would be a smart place to start.
Managing Director, Head of Research