Paul Montague-Smith, senior counsel – public affairs at MRM, looks at Rishi Sunak’s budget and ponders its ramifications, and why the next 12 months will be key to securing Tory victory at the next election
Gone is the secrecy and anticipation of yesteryear. Instead, there’s a well-trodden format for budgets nowadays:
- Announcements made days before
- A slap on the wrist for the Chancellor from the Speaker for not treating the Commons with the respect it deserves
- A few surprises held back for the day
- Followed by some unwinding of the Government’s narrative as the detail of the budget documents are scrutinised in the days that follow
No surprise then that a raft of measures was announced or briefed before the event – from more spending on health, transport and skills to a rise in the National Living Wage – all designed to signal the Government’s determination to deliver on its ‘levelling-up’ agenda.
This was pitched as the first ‘normal’ Budget post-pandemic (despite us not being through the woods yet). The main questions heading into the statement were:
- How well is the economy expected to recover?
- How much money will that give the Chancellor?
- What will he do with it – save or spend?
- Will it be a boosterish Boris budget, or a fiscally consolidating one?
Many expected the Chancellor to tighten the public expenditure purse strings, requiring cuts and efficiency savings in unprotected departments through the three-year spending review period.
Instead, he announced big spending across the board, spiking many of Labour’s guns in the process. A total of £150bn extra is allocated for departmental spending over the Parliament – a 3.8% increase in real terms.
Two key factors will have driven this approach. First, the Office for Budget Responsibility (OBR) forecasts gave him the room for manoeuvre. The economy has bounced back better than expected and is thought to have been less permanently scarred by the pandemic than originally feared. At 2% it is lower than modern recessions and well below the 10% loss caused by the 2008/9 financial crisis.
Borrowing is also less than expected. The Chancellor believes he has the room to increase spending further while meeting his fiscal rules, leaving £20bn headroom to protect against economic risks.
Secondly, he and the Prime Minister know that they have no time to waste in driving through changes that will be felt on the ground in the ‘Red Wall’ constituencies that they are determined to hold onto. Having lost 18 months of the Parliament to the pandemic, the next 12 months will be crucial in securing re-election.
With the cost of living going up and public services across the board struggling to recover from the pandemic, the choice was to ‘retrench or invest’. They decided to live up to their promise of ‘no return to austerity’ and double down on investment in the hope it will drive growth.
Many Conservative backbenchers are clearly uncomfortable at the historic high tax rates and public spending as a share of GDP that they are presiding over. But right now, they are more nervous about the rising cost of living and the impact on their constituents.
The 6.6% increase in the National Living Wage, the reduced Universal Credit taper and fuel duty freeze were all designed to address those concerns. Along with more spending on R&D, skills and business rates relief – particularly for the hospitality sector. They will have quite a bit of ammo with which to defend themselves on the doorstep.
There are concerns about how high and sticky inflation will be, whether growth has stalled and whether the Government’s recent focus on increasing wages could help stoke an inflationary spiral. If real incomes fall and public services don’t improve the Government could quickly end up unpopular.
The Chancellor wants to start the journey back towards a lower spending, lower tax economy before the end of this Parliament, but he knows how precarious things are. The public finances today are twice as sensitive to changes in interest rates as they were before the pandemic, and six times as sensitive more than before the financial crisis.
Just a one percentage point increase in inflation and interest rates would cost around £23bn. OBR and Bank of England forecasts have also not had the best of track records and previous Chancellors have not been very successful at meeting their fiscal rules.
Shadow Chancellor Rachel Reeves had the difficult job of responding for the Official Opposition – made doubly so because Keir Starmer had to pull out at the last minute after testing positive for Covid.
In the circumstances she made a reasonable fist of it, arguing that Brexit and Conservative incompetence had compounded current difficulties and that the Tories were now a party of high taxes and low growth. Everything seems topsy turvy nowadays….