Sunak’s shot in the arm for the UK economy.
When China sneezes, the world gets sick, as the economic saying (almost) goes. With international markets severely depressed by the ongoing public health crisis, the resulting grim economic projections provided a sombre overture to Rishi Sunak’s first Budget.
While this Budget sought to outlive its context, the outbreak of Covid-19 created two immediate problems for Sunak to square off, just weeks into the job. First, extensive isolation measures and a supply-side slump threaten the UK’s already unstable growth. Added to this is an urgency for government to expend fiscal resources on dealing with the virus.
The Chancellor is betting on the outbreak’s economic shock being temporary. While the Bank of England used its monetary levers this morning to brace for impact, Sunak outlined his fiscal solutions in the Commons, including a £5 billion Covid-19 response fund for the NHS, an extension of Statutory Sick Pay, and expanded business rate relief. The overall package came to some £30 billion, however the Chancellor’s pragmatic promise to spend “whatever it takes” leaves the cost potentially open-ended.
These measures have stolen the spotlight from the Prime Minister’s agenda of “levelling up” all regions of the country, which form the bulk of the Red Book. It is a remarkable feat – after ten years of Conservative led government – that Rishi Sunak could stand at the Despatch Box and say that people voted for change in the election. More remarkable is how stark that change could be. The Chancellor promised £640 billion of capital investment over the next five years to upgrade transport, communications, and public services. These were numbers that previously looked at home in the most audacious of Labour manifestos.
Road investment totals £27 billion, with further commitments including £5.2 billion in flood defences, a target to build a million new homes by 2025, and shipping 22,000 civil service jobs outside of London. The Low Pay Commission gets a remit to boost the national living wage, and Sunak confirmed the speculated increase in the National Insurance contribution threshold. Corporation Tax meanwhile stays at 19% in a suite of measures designed to support businesses, workers and their families.
Investments in innovation and R&D demonstrate the Government’s new priorities, and hope to bring online clean energy breakthroughs, though the freezing of fuel duty will draw criticism at a time when the Government are on track to miss their own 2050 net-zero emissions target.
Finally, Sunak promised to review the Government’s fiscal framework later this year, which may raise eyebrows on the Conservative benches. It is a good time to borrow to invest as yields on UK government bonds are at record lows, so the Treasury can effectively borrow money for free. Yet Conservatives will be reluctant to stray too far down this path and Sunak will be carefully weighing up his options in the months ahead. The Covid-19 crisis underlines a Cameron-era adage that still permeates the Treasury; fiscal policy is only as good as the economy it operates in.
Key announcements
The growth forecast is uncertain due to the coronavirus outbreak
▪ Economy predicted to grow 1.1% this year, not taking into account the impact of coronavirus.
▪ Annual output forecast to be 1.8% in 2021-22, 1.5% in 2022-23 and 1.3% in 2023-24.
▪ Inflation forecast of 1.4% this year, increasing to 1.8% in 2021-2022.
▪ Public sector net borrowing set to rise this year to 2.1% of GDP, rising to 2.4% and 2.8% in subsequent years.
▪ National Insurance Contributions tax threshold to rise from £8,632 to £9,500 – saving people just over £100 a year
There were big wins for small business
▪ To ease the potential impact of the worsening coronavirus outbreak, the Budget has provided significant support to businesses with the Chancellor announcing the abolishment of business rates for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000.
▪ This includes an increase in the business rates discount for pubs from £1,000 to £5,000 for this year. The planned rise in beer duty will also be cancelled.
▪ Museums, art galleries and theatres will also benefit from the 100% retail discount over the next financial year.
▪ He also announced a long-term review into the overall future of Business Rates later this year.
▪ A new national insurance relief also introduced for businesses that employ veterans.
The Budget provides the healthcare system with “whatever it needs, whatever it costs” to tackle coronavirus
▪ A £30bn package pledged to help the economy respond to coronavirus, including £1.4bn to be invested in science institute researching coronavirus.
▪ A £5bn emergency response fund announced to support the NHS and other public services, with the size of the fund to be reviewed as the situation develops.
▪ Statutory Sick Pay will be paid to all those who choose to self-isolate, even if they don’t have symptoms. With contributory employment Support Allowance benefit claimants being able to claim sick pay on day one, not after a week.
▪ £500m hardship fund announced for local authorities to support local people affected by coronavirus.
▪ Support also announced for businesses with employees affected by the virus. With firms with fewer than 250 staff being refunded for sick pay payments for two weeks and small firms able to access “business interruption” loans of up to £1.2m.
▪ The Government will also temporarily remove the requirement for physical attendance at the job centre.
▪ The Chancellor also announced the Government intend to keep their election pledge to ensure the NHS has the funding and support it needs, by announcing a further £6bn for the NHS, aimed at hiring 50,000 nurses, GPs and building the 40 new hospitals outlined in the Conservative manifesto.
Significant strides were made in positioning the UK as a technology, science and innovation hub
▪ The Budget sets out a path for bolstering the UK’s technology and scientific offering, with an extra £900m to ensure UK businesses are leading the way in high-potential technology and sectors, including nuclear fusion, space, electric vehicles, and life sciences. In addition, the Science Institute in Weybridge, Surrey will receive a £1.4bn funding boost.
▪ The Chancellor also announced a step change in R&D investment, with the government set to increase investment in science, innovation and technology to £22 billion by 2024-25 and R&D expenditure credit will be increasing from 12 to 13 per cent.
▪ For technology, this includes £5bn to deliver gigabit-capable broadband into the hardest to reach places and £510m of new investment into the shared rural phone network so that in the next five years 4G coverage will reach 95% of the country.
▪ More details on investment in new ideas is due to be announced at the spending review later this year.
Climate change measures fell short of the promised ‘green’ budget
▪ The Budget announced support to help more energy intensive industries to transition to net zero by extending the climate change agreement scheme for another two years. As part of this plan, the Chancellor announced a freeze on the Climate Change levy on electricity and a rise on gas.
▪ Fuel subsidies for off-road vehicles – known as red diesel – will be scrapped “for most sectors” in two years’ time exclusions, however, include farmers, rail operators, fishermen and domestic heating.
▪ To develop cleaner alternatives to red diesel, the Chancellor announced R&D investment in the energy innovation programme will double to £1bn.
▪ As well as taxing pollution, the Government will invest and cut taxes on clean transport – making it cheaper to buy clean vehicles. Whilst fuel duty will be frozen for the 10th consecutive year.
▪ The Chancellor also announced carbon capture and storage investments of £800m to create two or more carbon capture storage clusters by 2030 – creating up to 6,000 jobs.
▪ Plastic packaging tax announced to come into force from April 2022. Manufacturers and importers whose products have less than 30% recyclable material will be charged £200 per tonne.
▪ £640m “nature for climate fund” to protect natural habitats announced and includes planting over 30,000 hectares of trees.
The Budget provided the biggest investment in the transport network for ‘generations’
▪ The largest ever investment in English strategic roads, with over £27 billion between 2020 and 2025 and includes pressing ahead with high profile projects such as the A303. An additional £2.5bn will also be made available to fix potholes and resurface roads over five years.
▪ Commitment to connecting regional hubs with funding pledges to support the Manchester-Leeds leg of Northern Powerhouse Rail and an additional £20m to develop the Midlands Rail Hub.
Funding for a new train station at Cambridge South and the Midlands Rail hub, Darlington station moving to the next stage of development and approval, and new funding to make dozens of train stations more accessible.
▪ £500m to support the rollout of new rapid charging hubs, so that drivers are never more than 30 miles away from being able to charge up their car.
There was a spending boost to tackle rough sleeping and drive housebuilding
▪ Extending the affordable homes program with a new multi-year settlement of £12bn.
▪ An additional £1bn provided to the Building Safety Fund to remove unsafe cladding from buildings
▪ £650m of funding to help rough sleepers into permanent accommodation
▪ £400m for ambitious regional mayors to build homes on brownfield sites
▪ £1.1bn from the housing infrastructure fund to build 70,000 homes in areas of high demand.
▪ 2% Stamp Duty surcharge from April 2021 for non-UK residents.
Government investment outside of the South East will rise
▪ The Chancellor announced a new economic campus in the North with the aim to move 22,000 civil servant roles outside central London. As well as establishing Treasury offices in Scotland, Wales and Northern Ireland.
▪ New devolution deal for West Yorkshire, with the new Mayor and all other metro mayors to get new London style funding settlements worth £4.2bn. This is in addition to the Transforming Cities fund which will invest over 1bn in local transport in 12 further cities including Stoke, Preston, Nottingham, Derby and South Hampton.
▪ Pledged to review the Treasury Green Book, which sets out how decisions on major investment programmes are appraised in order to make sure that government investment spreads opportunity across the UK.
▪ Extra funding announced for devolved administrations – £640m for the Scottish Government, £360m for the Welsh Government and 210m for the Northern Ireland Executive.
▪ The Budget launches the Comprehensive Spending Review 2020 (CSR), setting out the overall level of public spending within which the CSR will be delivered. The CSR will conclude in July and will set out detailed spending plans for public services and investment, covering resource budgets for three years from 2021-22 to 2023-24 and capital budgets up to 2024-25.
