COVID-19 BUDGET

In presenting his budget to the House of Commons, Rishi Sunak, the Chancellor of the Exchequer, said:

‘This Budget meets the moment with a three-part plan to protect the jobs and livelihoods of the British people. First, we will continue doing whatever it takes to support the British people and businesses through this moment of crisis. Secondly, once we are on the way to recovery, we will need to begin fixing the public finances, and I want to be honest today about our plans to do that. Thirdly, in today’s Budget we begin the work of building our future economy.’

If what Rishi Sunak set out in his statement is his concept of an economic recovery and ‘fixing the public finances’ then the UK is in trouble. Underlying his approach is his assumption that everything was fine and dandy until the pandemic struck. That is not so. The UK has serious longs-standing economic problems.

Rishi Sunak placed high reliance on a forecast from the Office for Budget Responsibility (OBR), which he claimed showed that the UK would enjoy a ‘swifter and more sustained recovery’ than a previous forecast it made in November. Apparently, the UK will ‘return to its pre-Covid level by the middle of next year, six months earlier than previously thought. That means growth is faster, unemployment lower, wages higher, investment higher, household incomes higher’. Of course, this is all very convenient, but it is only a forecast. If the November forecast has turned out to be wrong after three months, then there is a danger that this one could be equally so.

The OBR forecast is very optimistic. Rishi Sunak said: ‘The OBR forecasts that our economy will grow this year by 4%, by 7.3% in 2022, then 1.7%, 1.6% and 1.7% in the last three years of the forecast.’ These OBR figures show a very bold bounce back in both 2021 and 2022, before more sluggish growth thereafter. What if the bounce back is not so bold, if it happens at all?

Rishi Sunak explained the scale of the borrowing involved:

‘At this Budget, we are announcing an additional £65 billion of measures over this year and next to support the economy in response to coronavirus. Taking into account the significant support announced at the spending review, this means that our total Covid support package this year and next is £352 billion. Once you include the measures announced at the spring Budget last year, including the step change in capital investment, total fiscal support from this Government over this year and next amounts to £407 billion…

The OBR’s fiscal forecasts show that this year, we have borrowed a record amount: £355 billion. That is 17% of our national income – the highest level of borrowing since world war two. Next year, as we continue our unprecedented response to this crisis, borrowing is forecast to be £234 billion, 10.3% of GDP – an amount so large it has only one rival in recent history: this year.

Without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely. Instead, because of the steps I am taking today, borrowing falls to 4.5% of GDP in 2022-23, 3.5% in 2023-24 and then 2.9% and 2.8% in the following two years. While underlying debt rises from 88.8% of GDP this year to 93.8% next year, it then peaks at 97.1% in 2023-24 before stabilising and falling slightly to 97% and 96.8% in the final two years of the forecast…

When the next crisis comes, we need to be able to act again. While our borrowing costs are affordable right now, interest rates and inflation may not stay low forever, and just a one percentage point increase in both would now cost us over £25 billion. As we have seen in the markets over the last few weeks, sovereign bond yields can rise sharply.’

That the budget was for the whole UK was, rightly, acknowledged, although the deficiency of the lack of any financial management of England was not. As ever, there were more subsidies for the other nations:

‘Millions of families and businesses in Scotland, Wales and Northern Ireland have contributed to and benefited from our coronavirus response. Central to that has been a Treasury that acts for the whole United Kingdom. That is not a political point; it is an undeniable truth. The majority of today’s Budget measures will apply directly to people in all four nations of the UK … Through the Barnett formula, the decisions I am taking in this Budget also increase the funding for the devolved Administrations by £1.2 billion in Scotland, £740 million in Wales, and £410 million for the Northern Ireland Executive.’

Rishi Sunak expressed great concern about housing:

‘I am announcing today a new policy to stand behind homebuyers: a mortgage guarantee. Lenders who provide mortgages to home buyers who can afford only a 5% deposit will benefit from a Government guarantee on those mortgages. I am pleased to say that several of the country’s largest lenders, including Lloyds, NatWest, Santander, Barclays and HSBC, will be offering these 95% mortgages from next month. I know that more, including Virgin Money, will follow shortly after. This is a policy that gives people who cannot afford a big deposit the chance to buy their own home. As the Prime Minister has said, we want to turn “generation rent” into “generation buy”.’

Rishi Sunak might be correct to say that this gesture would give some ‘the chance to buy their own home’, but it is a pretty slim chance. There is a serious housing shortage and immigrants are pouring in. Subsidising mortgages will not solve that. To put it simply, if there are 100 houses and 110 potential buyers, then 10 of those potential buyers will not be able to buy their own house. Subsidising the mortgages will not change that as there are only 100 houses for 110 buyers. The UK will not be able to address the housing shortage until it stops mass immigration, which is something the Tories do not want to do. They are politically correct and are globalists. Their policy is Open Borders Britain.

The danger posed by inflation is real, especially since the Government is funding itself by relying upon borrowing printed money from the Bank of England.

Boris Johnson’s economic policy prior to the pandemic was straightforward. He intended to borrow a lot of money, and then spend it. Rishi Sunak has sustained the economy by borrowing printed money, and for so doing is regarded as a genius, if not a potential future prime minister. What the Government is not doing is tackling the underlying problems with the economy. Arguably, the biggest problem is the trade deficit (for the reasons set out here and here). This is where the big money is.

The Tories reputation for sound economic management is undeserved. They might be less spendthrift than socialists, but they are fully capable of messing things up. The deep recession of the inter-war years was a Tory initiative, as was the Barber Boom (which plunged the UK into a recession after a brief burst of economic growth) that left a legacy of inflation in the 1970s, and the Thatcher era started with a deep recession in the early 1980s and ended with another in the ERM debacle (with a legacy of negative equity for many in the 1990s).

There is currently a lot of excitable talk of a New Deal style programme to boost economic growth. The New Deal programme in the 1930s applied to the USA and not the UK. What got the UK out of its hole in the 1930s was the introduction of the general tariff. That is an historical fact.

Rishi Sunak’s budget should be rejected. It is a dodge to avoid the difficult decisions. It entails borrowing vast sums of printed money, followed by a stealth policy of austerity. If the OBR forecast is wrong, then the UK is in serious trouble. The Tories need to be forced to take the difficult decisions, including bringing the UK’s trade with the EU and China into balance, or else they need replacing with a government that will.