George Parker: Five things you may have missed about the Budget
Delivered to a backdrop of mounting concern over coronavirus, Rishi Sunak’s first Budget turned on the taps to end a decade of austerity. The FT’s George Parker delves into the detail of the chancellor’s fiscal package
NOT EVERYONE LIKED IT
Rishi Sunak woke up on March 12 to the kind of headlines of which chancellors dream: Dr Feelgood, as the Daily Mail dubbed him, had tackled the coronavirus with a £12bn package while ending a decade of austerity with a vast programme of borrowing-fuelled spending.
With interest rates very low – and expected to stay low for a long time – there was a general consensus that Sunak’s impressively assured 65-minute speech made good economic sense and was long overdue.
But the sheer length of Sunak’s list of spending promises made some Tory MPs nervous. In the tearoom and corridors after the Budget, it was easy to find Conservatives who felt the party was at risk of tarnishing its reputation for fiscal discipline.
Even Theresa May, who fought her own battles to get her chancellor Philip Hammond to open the spending taps, warned: “While spending a lot of money might be popular and may seem the natural thing to do, there must be a realistic assessment of the longer-term impact of those decisions.”
Robert Chote, outgoing head of the Office for Budget Responsibility, cautioned: “The public finances are much more vulnerable to inflation and interest rate surprises than they were.”
CHANGING THE SPENDING RULES
With £100bn earmarked for investment over the next five years (mostly borrowed money), it will be vital that Sunak’s “historic” splurge on roads, railways, research, broadband and other infrastructure is wisely spent and actually raises Britain’s productive potential.
In the past the Treasury has assessed the value for money of such projects using the so-called “green book”, a set of rules which judge the benefit/cost ratio of any scheme. Sunak, crucially, announced in the Budget that these rules will be rewritten.
Many agree this is a good thing. For example, because London and the South East are Britain’s most productive region, building a new road here offers the Treasury the best bang for its buck. But it is also a self-perpetuating mechanism for keeping the South rich.
But changing the rules could spawn white elephants. Boris Johnson, no stranger to fanciful infrastructure projects, is eyeing a bridge or tunnel from Scotland to Northern Ireland. The £2bn A303 Stonehenge tunnel is another project which failed the usual Treasury value-for-money test.
THE COST OF BREXIT
Rishi Sunak barely mentioned Brexit and certainly offered no additional support for companies – notably exporters – faced with the imminent introduction of new border controls from January 1 2021. Ministers do not dispute that companies may need to hire 50,000 staff to fill in forms.
But the small print of the Budget documents revealed the economic cost of Brexit, a handy insight given that Michael Gove announced on Budget day that the government would not be producing an economic impact assessment of its favoured “Canada-style” trade deal with the EU.
The OBR modelled for a 5.2 per cent cut in Britain’s growth potential over 15 years, partly caused by falling productivity, and for a 15 per cent fall in trade between the UK and its biggest trading partner.
Meanwhile the government’s new migration policy, intended to stop the flow of lower-skilled workers from the EU, would cost the public purse £1bn a year by 2024 and also cut Britain’s growth rate. On the plus side Britain will start to recoup billions of pounds of net payments to Brussels.
There was a lot of tension between Number 10 and the Treasury ahead of this Budget – as Sajid Javid can testify – but one area where both sides agreed was that money invested in science, innovation and research was money well spent.
For Dominic Cummings, Boris Johnson’s chief adviser, this is his over-riding priority in government. He might like picking fights with everyone, from the BBC to the House of Lords, but his real dream is to create a “blue-skies thinking” research agency.
Sunak confirmed he was putting £800m into Mr Cummings’s pet project – based on the US Advanced Research Projects Agency – plus £900m into space, electric vehicles and nuclear fusion.
Overall the Budget represented a genuinely transformational moment for British science. From the Treasury’s point of view, it is far more sensible than blowing money on a bridge to Northern Ireland.
Sunak’s first Budget was impressive in its scale but inevitably it could not cover everything. The coronavirus outbreak, and the need to launch a fiscal stimulus, meant that some tax rises may have been delayed until later in the parliament.
Even if Sunak rewrites his fiscal rules to allow even more borrowing, expect future Budgets to address thorny issues such as social care, whose funding remains one of the biggest problems facing the government.
Higher taxes on fuel – deferred again in this Budget – are likely to be introduced soon, as the government targets its carbon change obligations. Pensions taxation remains a mess and the NHS will need even more funding in the longer term. The next Budget could be tougher.