We must be thankful that no-one is forecasting that Government borrowing will rise to record levels this year. Or Rishi Sunak wouldn’t have been in a position to announce that Government spending will rise at its fastest rate for 15 years.
Apologies for the sarcasm – which isn’t aimed at the Chancellor’s measures, but is meant instead to provide an introduction to the thinking behind them.
One response to a ballooning deficit is to cut the rate of growth of spending. That’s what the Coalition did after 2010, when the deficit hit seven per cent of GDP.
The Office for Budget Responsibility is forecasting a peak of 19 per this year. But Sunak’s response is to raise the rate of spending. Why?
Because in 2010 George Osborne judged the deficit to be structural (he was right), and his successor judges this one to be exceptional (he’s right, too).
It is almost entirely a product of the pandemic and what has followed. It is in this context that the OBR forecasts the economy to shrink by 11 per cent this year and unemployment to hit 2.6 million next year.
In these circumstances, the Chancellor has found it impossible to produce the four year spending review he hoped for, and has been forced to issue one for a single year instead.
Furthermore, his statement was only one side of the tax and spending coin. Today, we got the spending. In the Spring, we will get the Budget – and the tax.
Given all this, it will be very odd if Sunak turns up then with large-scale tax rises to raise revenue quickly. The foundation of his measures today appears to be: suck it and see.
Broadly speaking, the spending package suggests that the Chancellor is going for growth. That’s the logic of the infrastructure spending, the coming review of regulation, the new northern bank and the enlarged Restart programme.
The Levelling-Up Fund is a classic Treasury exercise in the English centralist tradition, with its central feature of bids from the provinces to Westminster for money. So it is in a country with relatively few local taxes.
On that point, Sunak announced “extra flexibility for Council Tax and Adult Social Care precept”. Local authorities will like that, council taxpayers not so much.
It’s worth stressing that the OBR’s forecasts, like all such animals, shouldn’t be taken too seriously. Our columnist Ryan Bourne debunked its record on this site earlier this week.
If you walk down the sunny side of the street, you will smack your lips at the thought of a Roaring Twenties effect, as employment recovers, consumers spend, the hospitality sector booms and people pile into holidays abroad.
And it may be that post-Covid changes even out for the better, with a shift in activity and spending from city centres to the suburbs and countryside, together with music, art, theatre and all the rest of it.
That might not be such a bad things for towns and their centres, at which the new Levelling Up Fund is partly aimed. Our columnist James Frayne believes they are a core concern for provincial voters, and government listens to him.
If on the other hand you stick to the shady side, you will point to the economic equivalent of Long Covid: fearsome economic and social bills for damaged mental health, postponed operations, lost educational opportunities.
All that is a big minus for levelling-up – because it’s the disabled, poor and disadvantaged who have been hit hardest by restrictions and lockdowns, especially if they work in the private sector.
The background in recent years is not encouraging. Since the financial crash exploded, we haven’t grown at more than 2.6 per cent a year. That suggests recovery may be sticky.
Sunak’s persuasive manner, grip of detail and spare eloquence have served him well during this crisis. Others holding his post would not have survived roughly ten major finance annoucements in less than a year.
It’s not as though he hasn’t sometimes had to recast his plans – as in October, when he pumped more money into his Job Support Scheme.
And if the economics of his strategy are straightforward enough, its politics was sometimes a bit odd. If the Government’s overall plan in the short-term is expansionary, why raise the minimum wage but curb public sector pay?
If spending on nearly everything else is rising, why crack down on the 0.7 per cent aid spend? Doing so because you think aid is wasted or the target is wasteful is one thing.
But that wasn’t the basis of Sunak’s decision – since, after all, he said that the Government intends to return to 0.7 per cent “when the fiscal situation allows”.
The Chancellor also left a big unresolved question hanging in the air. What will the Government do about the Universal Credit uplift? Will it be extended or not?
The sense of a statement with contradictory messages was picked up Rob Covile of the Centre for Policy Studies. (The Treasury would do well when the Budget approaches to look at its supply side ideas.)
“Feels slightly like Treasury couldn’t decide whether the message was ‘tighten belts’ or ‘we’re still spending’,” he tweeted. “So we’re getting two or three minutes of each in turn.”
That first element in the Chancellor’s statement, plus the OBR’s horrid short-term forecasts, comes at a bad time for the Government.
For tomorrow, the toughened tiering details are announced. Lots of Conservative MPs won’t like them. The detail of which tiers apply in which areas will be published, too. Many Tory MPs will like those even less.
Graham Brady, Steve Baker, Mark Harper, and the Covid Recovery Group will say that the economic damage of restrictions is so severe that the Commons should not vote for more – at least, without an impact assessment.
They may not be alone. “These measures may be a short-term strategy, but they cannot be a long-term one,” Jeremy Wright declared in the Commons during the recent debate on the lockdown regulations.
He and Edward Timpson (another ex-Minister) plus other MPs backed the Government but, sounded a cautionary note.
Will the prospect of vaccines be sufficient to rally the doubters round? Or will they take a leaf from the book of Theresa May, who savaged the regulations during the same debate?
We shall see – but Ministers are not helping themselves by dodging requests for that impact assessment, urged by this site and others, and the subject of a dogged campaign by Mel Stride, Chair of the Treasury Select Committee.
All in all, Sunak is shaping up to go for growth. Good for him. Nonetheless, he must watch and wait to see how and when the economy rebounds. Brady and company are less patient.