The first Budget of a Parliament sometimes seeks to align the economic and politic cycles by raising taxes and cutting spending (strictly speaking, the rate of spending). Nasty stuff first; nice stuff later – when there’s a general election around the corner. The hard choices that the new Government makes help to demonstrate its priorities.
Rishi Sunak’s package tomorrow was never going to be like that – and will be even less like it now. For four main reasons.
First, because Boris Johnson’s natural inclination is for Bridges and Circuses – or “boosterism”, as he has called it – and this preference was duly reflected in the recent Conservative Manifesto’s headline pledges.
Second, because the exigencies of Brexit require a neutral Budget at least, if not an expansionary one.
Third, because of the Coronavirus.
And finally because of the pervasive fear of a credit crunch, which was out and about in any event, but which the spread of the virus has accentuated.
As it happens, the current spending picture, though not capital spending, has looked fairly constrained. Hence the Prime Minister’s call in Cabinet last month for departmental spending restraint even if it means “slaughtering sacred cows”.
Planned increases were due to be concentrated on those headline pledges: 50,000 more nurses; 20,000 more police; “millions more invested each week on science, schools, apprenticeships and infrastructure”; a new immigration system. Johnson and Sajid Javid were at odds over the implementation of the fiscal rules.
The Coronavirus has decisively swung the argument the Prime Minister’s way, at least for the time being. (That’s rotten timing for Javid, who’s clearly seeking to take a stand as the rules’ guardian.)
Rishi Sunak is committed both to help businesses survive its impact and people to work from home. Neither he, this site nor anyone else knows how much assistance firms will require, nor how many workers will self-isolate or for how long. Fiscal rules are not designed for circumstances like these and must effectively be waived for as long as the crisis lasts.
Delaying the payment of VAT, payroll taxes and corporate tax; using the Employment Allowance for a National Insurance holiday; compensating firms with high statutory sick pay bills – all this and more is on the cards for firms, and will cost.
Extending sick pay, paying it earlier, easing the conditions under which Universal Credit is receieved – these schemes and others will be available to those who must work from home. We’re sceptical about whether a VAT cut would have much impact on consumer spending in the circumstances that are set to come.
And of course NHS spending in particular will be under no restraint. Anything the service asks for it will get.
On that point about a credit crunch, expect to see the Government underwriting Funding-for-Lending type schemes, as in the aftermath of the financial crisis. To put it very crudely, Johnson and Sunak will printing more money – lots of it.
It may be that Dominic Cummings is searching, as we write, to link the freedoms of Brexit to tackling the virus, by scrutinising the EU rules and restrictions that govern scientific research, and looking for room for manoeuvre.
More broadly, it’s clear that the Budget will contain a symbolic tax cut. The tampon tax will first have VAT removed from it and then be abolished altogether. If Sunak is looking for other measures, he could do worse than take tips from his new colleague, Anthony Browne. The latter has punted cutting VAT on domestic electricity on this site. The Chancellor could take the idea up now. Browne also floated restoring duty free. That one will doubtless have to wait.
Elsewhere, those tough choices that help to demonstrate what a new Government is all about may have to wait for another day. A mansion tax, reductions in tax relief on pension contributions for higher earners, VAT on fuel: all have been mooted; all are unlikely, though Sunak may go for a consultation on pensions and signal a VAT fuel rise in due course.
Instead, expect to hear plenty about levelling-up and improving productivity outside the Greater South East. There is a lively debate on the centre-right about whether that implies moving people to jobs (broadly speaking, in cities) or seeking to move jobs to people (in towns).
Whichever view you take, the Government should aim to improve transport links (which it will: see its manifesto commitments on roads and reversing some of the Beeching rail closures) and ease planning restraints (which it may or may not do: there has been briefing to that effect, but backbench resistance would be considerable).
Sam Bowman and Stian Westlake have been at the forefront of this productivity debate, and the Chancellor could do a lot worse than take up the latter’s call on this site for making the Annual Investment Allowance unlimited. See also our columnist Neil O’Brien’s recent research into the balance of spending between London and elsewhere. The Government has signalled support for that, too.
Many will yearn for a Budget that is altogether different. Some would like a radical tax-cutting package, which slashes income tax rates, corporation tax, inheritance tax and capital gains tax.
Others, like us, believe that any such plan would have to march in step with spending restraint. Which would mean reducing, inter alia, the third or so that goes on healthcare, pensions, and social care. Lawsonian tax cuts go hand-in-hand with Thatcherite public reform.
Others still puzzle about what plans Johnson has, if any, to “level up” people as well as places. That means not only the “just about managing”, but also those who aren’t managing at all: rough sleeps, the severely indebted, the substance-and-alcohol dependent, those struggling with mental health. This is a subject to which we will return.
But for the moment, much of all this will have to wait. The inference of yesterday’s Prime Ministerial press conference was that an Italy-style shutdown is on its way here in Britain. Other countries are likely to follow. The interplay between the coronavirus, the recent oil price fall, the banks, corporate debt and America’s response to the illness bode badly. The Coronavirus has the capacity to be an economic 9/11.
So Sunak has his hands full – and more than. He must square up tomorrow to biggest challenge that a Chancellor has faced since the financial crash. For him, it is the worst of times: he must help to provide reassurance, action and leadership. Strangely, it is therefore also the best of times. He is elevated from the grubby plane of normal partisan politics to the dizzying heights of negotiating a national social emergency. That has an upside as well as a downside.