Wednesday’s U.K. budget offered yet more in the way of pandemic pain medication, but thanks to the success of Britain’s vaccination program, Chancellor of the Exchequer Rishi Sunak could make a start at mapping out a post-Covid order. The short-term, at least, is looking rosier for Britain.
Sunak decided, correctly, that it was too soon to focus on repairing public finances at the expense of pandemic relief. The U.K. is seven weeks into a third national lockdown and while kids return to school next week, the country will have to wait until June 21 for a full reopening. Many businesses, especially in hospitality and retail, are running out of cash and their survival is in question.
Sunak provided 44 billion pounds ($61 billion) more in near-term support for the economy, bringing the expected government deficit in 2021-22 to 10% of gross domestic product, down from 17% last year. Britain’s furlough scheme, among the world’s most generous, was extended until June. There was more temporary relief from taxes for businesses, as well as grants, aid to the self-employed and an extension of the temporary uplift to unemployment payments.
But it’s the vaccine rollout, rather than the government’s check writing, that gives grounds for optimism. The U.K. (population 67 million) has administered more than 20 million vaccine doses, one of the highest vaccination rates anywhere and more than Germany, France, Italy and Spain combined. In much of Europe vaccinations have been hampered by slow approvals, irresponsible politics and lagging distribution.
It won’t be easy to turn the spending taps off with Johnson
pledging to “level up” Britain’s poorer regions and targeting
net-zero carbon emissions by 2050. The hope is that these big
projects will spur the economy but any lavish spending won’t
sit comfortably with much of the Tory faithful
Nothing can reverse Britain’s huge pandemic death toll nor its many Covid mistakes last year, but the vaccination effort provides a far more benign economic scenario. The Office for Budget Responsibility says the rapid rollout of jabs means output will return to pre-pandemic levels by the middle of 2022, six months earlier than it forecast in November.
That has all kinds of knock-on effects. It means less government borrowing and fewer job losses. The OBR expects unemployment to peak at 6.5% (it’s currently 5%), far lower than was anticipated last year.
Sunak wisely stuck to the Conservative Party’s electoral promise not to raise income taxes, National Insurance (Britain’s social-security tax) or VAT. This is not the time to put a dampener on spending, and Britain can’t tax its way to growth. A jump in corporate taxes from 19% to 25% applies only to companies with profits above 250,000 pounds, and it won’t be introduced until 2023. Even so, it won’t go down well with the Tories’ traditional free-market base.
Sunak argues that Britain will still have a comparatively low business tax rate. However, as the OBR noted, by 2025 Britain’s total tax burden will be the highest since Labour’s Roy Jenkins was chancellor in the 1960s. Sunak offset his future corporate tax grab with a new two-year “super deduction,” allowing companies to cut their tax bill by up to 25 pence for every pound they invest.
Andy Haldane, the Bank of England’s chief economist, recently described the U.K. economy as “a coiled spring.” The ratio of household savings as a proportion of disposable income increased dramatically to 26.5% in the second quarter of last year, the highest on record. It remains high and most of those savings are in deposit accounts.
That augurs well for those expecting a post-lockdown consumer blowout in the spring and summer. What about afterwards, though, when the spring has sprung and we’ve all gorged on restaurant meals, bought new outfits and had our holidays? To turn a summer rally into a sustained recovery will take more than Sunak’s relief medication — especially with the trade effects of Brexit being digested.
The pandemic is forecast to leave the U.K. economy 3% smaller in five years than it would have been otherwise. Brexit may cut it by 4% relative to what it would have been over a longer period. It will take real magic to thrive in this medium-term scenario, and that’s the challenge for Sunak and Prime Minister Boris Johnson.
It won’t be easy to turn the spending taps off with Johnson pledging to “level up” Britain’s poorer regions and targeting net-zero carbon emissions by 2050. The hope is that these big projects will spur the economy but any lavish spending won’t sit comfortably with much of the Tory faithful.
While Sunak announced a new infrastructure bank to be based in Leeds to help the rebalancing effort, finding shovel-ready projects is never easy. He also announced eight freeports — special economic zones in which manufacturers import duty-free. On their own, freeports provide only modest economic incentives, but Sunak is hoping tax breaks and regulatory relief can make them attractive places to invest and thereby rejuvenate deprived areas.
As for net-zero, Sunak announced the U.K.’s first green bonds, though it’s unclear how the U.K. will find the 50 billion pounds or so of annual green investment that the country’s Climate Change Committee estimates is needed for the next 30 years.
The government has other large spending demands, too. Britain has a National Health Service with an insatiable demand for public investment. Social care for the elderly and those with chronic conditions has also been promised proper funding.
The new corporate tax hikes and high government borrowing — with 295 billion pounds of bond sales planned in the next fiscal year — hint at this government’s ambition, though. Conservatives like Sunak used to believe that having a big government limited its effectiveness and curtailed people’s freedom. Not so much these days. The bet now is that huge state expenditure and regulatory change, along with some tax increases, can lift investment and generate growth. Squint and you could see it as a Labour project.
Other governments have promised similar feats with disappointing results. Much rides on whether new programs of training, education and apprenticeships prove effective, and also on whether the post-Brexit economy can attract investors.
Still, it’s healthy to see old orthodoxies challenged. Covid and Brexit have made Johnson’s twin reform goals of leveling up and net-zero emissions much harder, but they’ve also provided an excuse to do things differently.
Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.