Rishi Sunak has laid out the scale of the economic emergency that in his words has “only just begun” and has signalled the pain to come. GDP will fall over 11% after months of economic life support for businesses and workers. While that is slightly better than expected it won’t claw its way back to pre-coronavirus levels until the end of 2022. One million more people are also forecast to lose their jobs by June of next year. Both are central estimates – the path of the virus could easily mean it’s worse.
The Government has spent over £280bn on coronavirus-related measures so far and expects to borrow a peacetime record of £349bn by April. This will have to be paid for so tough choices lie ahead. Breaking a manifesto pledge by cutting foreign aid will save around £5bn for the Exchequer but has already led to a ministerial resignation. The Chancellor knows the majority of the public support the cut, but it faces a rough ride through Parliament.
His decision to freeze public sector pay grates against praise heaped on key workers by ministers since March. The arguments behind it are sound, but the presentational issues are challenging. There are exceptions for those below medium income and NHS workers though.
The Government’s plan, for now, is to crack on with investments in public services and infrastructure while it waits to see how things play out over the next few months. Many expect the Budget due in March to be the point at which the Chancellor will start the ‘big claw back’, perhaps ditching more manifesto commitments on big revenue-raisers like income tax and the pensions triple lock. The new language of an “economic emergency” could be him preparing the ground for that. But the chances are that large parts of the country will still be under restrictions then.
Conservative parliamentarians – including usually fiscal hawks – argue that tax rises should wait for fear of stifling recovery. Politically, it makes sense to get the pain out of the way now in the hope that rebounding growth by 2024 will make voters forgiving. But economically, major tax rises could be the wrong call.
By March of course we’ll finally know where we stand on our relationship with the EU. As of writing the negotiations remain deadlocked. The OBR has forecast that a no deal outcome will hit UK GDP by an extra 2% next year alone, which seems to have led to a toughening of the language from Brussels. If the country ends up with WTO the Government will be under pressure to make policy changes and trade deals to make up for the impact.
Meanwhile the Treasury has published proposals for reforming the post-Brexit financial regulatory framework. The plan is to move the bulk of retained EU directives from the statute book to regulators’ rule-books. It argues having so much detail in primary legislation limits lawmakers’ agility. It also says this presents challenges for Parliament’s ability to keep it up to date.
It is also thought more complex for firms who otherwise face a fragmented rulebook. The result will be the FCA and PRA having a much bigger role in policy making. The Financial Services Bill currently before the Commons starts this process, covering the prudential regulation of credit institutions and investment firms.
The new approach will mean changes to the Financial Services and Markets Act to create new policy frameworks in key sectors. Regulators will have to take account of these when designing rules. The Commons Treasury Committee has launched an inquiry and call for evidence on the plans.
Both the government consultation and Treasury Committee inquiry present a significant opportunity for financial services firms to shape the future architecture of regulation – as well as regulators’ accountability and stakeholder input into the policymaking process.
Economic and Brexit crises aside then, there is plenty of policy work to keep the sector busy in the weeks ahead!