The secret to a great economy? Timing.

26 Feb 2021

Toby Chapman takes a look at what might be in store in the upcoming Budget, the challenges for Rishi Sunak and the economy.

Shaping the post-covid economy

Difficult as it is to believe, Rishi Sunak has so far only delivered one Budget as Chancellor of the Exchequer. His second will prove even more significant as the UK faces the challenges of finding its feet outside the EU, navigating a steady but pronounced recovery from coronavirus restrictions, and, of course, reversing the biggest contraction in the UK economy in over three centuries. What he announces will shape the nature of the economy for a post-covid generation, but there are reasons he may want to wait a while longer before truly ‘bouncing back’.

The reluctant Keynesian

Much was made of Rishi Sunak’s fiscal conservative credentials when he was unexpectedly appointed Chancellor little over a year ago, but it bears repeating: this broadly Thatcherite, laissez faire, free market hawk has overseen the most comprehensive economic intervention by government in living memory, drastically increasing the national debt and the budget deficit. Since we can safely assume the overactive public spending of the last 11 months goes against the Chancellor’s own instincts, the question is, when will he deem it proper to reverse course?

The long reopening

The government’s persistent tone over the last two months of cautious, incremental reopening, is indicative of the central fact that the nation is still in crisis. As such, the Budget is expected to reflect this by extending the emergency support measures already in place. The majority of analysts predict that most major emergency measures will be extended at least into the summer, including the Job Retention, or ‘furlough’ scheme, the stamp duty holiday, and the £20 uplift in universal credit.

Some tentative moves towards weaning businesses off government support are expected, like replacing existing business support schemes like ‘bounce back’ loans with a consolidated, state-guaranteed loan scheme. But by and large the key emergency measures are expected to continue in some form. So, what are the plans for the post-covid agenda?

Seeing past the crisis

A key point of the post-pandemic economic programme that is likely to make a strong appearance, is the government’s commitment to a green agenda. In the build up to the UK’s hosting of COP26 in November, the Chancellor will likely see his announcement as an opportunity to emphasise the Net Zero 2050 target, possibly with an increase on fuel duty, and more investment and incentive schemes in renewable technologies.

Sunak must also consider political pressures from all sides. For example, Labour has been calling for greater support to lower income households and more ambitious measures for rebuilding the economy after the pandemic. The Prime Minister leapt at the chance to shed his newly cautious demeanour and return to his preferred grand promises, claiming that the Chancellor’s Budget would “do far more than the paltry agenda” set out by Keir Starmer. The government may be optimistic they can keep beating Labour at their own game when it comes to public spending, but that means the real political danger may come from their own backbenchers.

The Opposition is coming from inside the House

Traditional anti-big government conservatives have warned against the public becoming reliant on direct support from the state. Simultaneously, the so-called Covid Recovery Group (estimated to number anywhere upwards of 60 Tory MPs) has been calling to rapidly reopen the economy, and to boost revenue and footfall in the hospitality sector through financial stimulus measures. Given that Sunak is rumoured to be considering a second run of last August’s ‘Eat Out to Help Out’ scheme (despite a Warwick University study which found it contributed to the second wave of coronavirus infections), he is likely hoping to use similar, smaller spending incentives to satiate his more headstrong colleagues for the time being.

Taxation terror

What remains consistent across the political spectrum, is the fear of tax rises in this budget. Opposition politicians, Tory backbenchers, and economists all agree that any major tax increases should be left until the recovery has fully taken hold so as to avoid stalling the economy. Fears among major retailers of a new online sales tax are unlikely to be realised any time soon, though such a move could become a lucrative option in the longer term. Nonetheless, the Chancellor has heavily hinted that the government will have to foot the substantial bill for pandemic relief at some point, and the Prime Minister has repeatedly declined to rule out tax increases. Once again, it comes down to a question of timing. Should Sunak risk a short, sharp shock in the hope that tax hikes have slipped from public memory by the next general election? Or should he let the good times roll and risk sticking voters and party allies with the bill once it balloons further?

Allies of circumstance

Most observers think it is clear what kind of budget the Chancellor wants to present, so when will he finally do so? Will he look to stave off the post-covid agenda in the hopes of a buoyed economy in strong recovery, or tackle it head-on and quickly return to his fiscally conservative roots? Such considerations are, as ever, political as well as economic. Prime Ministers and Chancellors historically butt heads over spending, but so far, the coronavirus crisis seems to have avoided major disagreements between No. 10 and No. 11. But as Boris Johnson begins pushing to ‘build back better’, tensions are likely to rise.

Sunak will be aware that he remains the most popular politician in government. Much of that popularity stems from his policies of wide-ranging financial support and being the face of economic stimulus for businesses and consumers alike. Such policies go against Sunak’s better judgement but have arguably made him a future contender for Prime Minister. He may use this budget to begin a gradual return to fiscal conservatism, while attempting to retain his lead in the polls. It remains to be seen whether this will prompt any sniping from Boris Johnson, no doubt envious of Sunak’s personal popularity, and how long such a balancing act can remain feasible.

Photo credit to: Jack Hill