‘Risky economic growth boost is Chancellor’s only palatable option’

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Peter Urwin, Professor of Applied Economics at the University of Westminster, spoke to Business Leader regarding the Spring Budget, which was set out by the Chancellor.

With the country still in lockdown and a clear roadmap set out by his colleague at No. 10, the Chancellor’s continued focus on supporting families and business through the crisis was widely trailed ahead of this budget. Extension of the Coronavirus Job Retention Scheme (CJRS) to September, the VAT cut for hospitality, extension of the £20-a-week top up to universal credit and a range of other measures were no surprise.

But what of his stated aim to be ‘open and honest’ with the British People? It was too early for a truly difficult conversation that could negatively impact recovery in the second half of 2021. The rumoured raising of corporation tax above 19% will be introduced in April 2023 to 25%, with a ‘small profits’ rate to protect smaller businesses. Together with a freezing of the personal income tax allowance these are a start, but they are sticking plasters. Politics and economics gave Mr Sunak little choice over his future long-term strategy, as only one of the three options open to him is palatable – but it is very high risk.

First, a direct attack on the deficit via tax rises and spending cuts would break 2019 manifesto promises, bring back a period of austerity and likely dampen any economic recovery. How much more can be done, beyond the current public sector pay freeze and cut to overseas aid? It is hard to imagine cuts to Health, Education or Welfare and any loosening of the Triple-Locked State Pension would hit core Conservative voters. Together these account for around 65% of government spending and in the medium-term spending in these areas is likely to rise, as the NHS deals with a backlog of treatments, unemployment rises, and we try to make-up for lost learning. The Chancellor could defend some tax rises, as part of his government’s Green Agenda, but these are designed to support a re-orientation of the economy away from carbon – the right choice, but a disruption to economic growth.

This left the Chancellor with the options of either boosting growth and/or inflation to reduce the real value of the deficit – a combination of growth and inflation is how we dealt with the debt burden arising from WWII. Facing a 2% inflation target, this left the Chancellor no choice but to go for growth – a big debt is not a problem if you have a big income, so a steep increase in the size of the economy makes the problem more manageable.

The Chancellor made clear that his long-term solution to our problems is a research and investment-led, private enterprise driven, regulation-lite productivity miracle. Announcements on ‘super deductions’ for business investment, policies to support a ‘scientific superpower’, free ports, a UK Infrastructure Bank and a variety of others reflect a clear direction of travel. ‘Miracle’ is perhaps a little harsh, but the Chancellor’s own defence that this is ‘not hubristic’ reflects the fact that, the last time we achieved such a feat was in the second half of the 19th Century. In common with the present environment, the period between 1850 and 1900 was also one of low interest rates – but the risks are very high that a truly difficult conversation will still eventually be needed.

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