On 3 March 2021, the Chancellor, Rishi Sunak, unveiled his Budget. Billed as a ‘spend now, tax later’ Budget, the government claims that it represents a decisive break with the austerity of the past in favour of investing in growth and yet will take a responsible attitude to the health of the nation’s finances.
The government had previously promised growth and shared prosperity: as Boris Johnson put it at the start of his premiership: the UK will be “clean, green, prosperous, united, confident and ambitious.” And he has repeatedly spoken of levelling up.
To understand the Budget, and therefore to judge the extent to which it will help Johnson keep his promises, we must first disentangle the effects of COVID support from the overall thrust of the budget.
Our conclusion, having examined that overall thrust, is that this is not a budget for clean, green, shared prosperity, though it could have been far worse:
- Certainly, the Budget could have been far worse – there are numerous provisions without which the population of the UK would suffer greatly;
- the Budget, however, and the surrounding narrative in the media have a misguided panic about the issue of government finances rather than on rebuilding the economy; and so
- this is not the Budget the UK needs: it is an austerity Budget when we need a recovery and transformation Budget.
The Budget Could Have Been Far Worse
The Budget contains several measures for COVID support, without which many people and businesses would face enormous hardship:
“The Coronavirus Job Retention Scheme (CJRS) and Self-Employment Income Support Scheme (SEISS) will be extended to provide protection to businesses and individuals that continue to be affected by the restrictions. For those in need of direct income support, the government is extending the temporary Universal Credit increase and making a one-off payment to Working Tax Credit. The Budget also confirms rates for a range of taxes and duties for the coming year. To help people with the cost of living as the economy recovers, this includes freezes in fuel and alcohol duty.”
The Budget continues the 20% uplift to universal credit, without which the Joseph Rowntree foundation estimates that 500,000 people will be plunged into poverty. The uplift, however, is only guaranteed until September, so this may simply be a case of impoverishment deferred.
The Office for Budget Responsibility (OBR) has calculated the impact of the Budget measures on Public Sector Net Borrowing. You can see how large, but also how temporary, the COVID-related spending boost is. In the long run, this is an austerity budget.
There is a Misguided Panic about ‘Government Finances’
Both in the Budget itself and in the press coverage of it, there is more focus on ‘the state of government finances’ than there is on economic growth overall, climate change or the way that a normal member of society will be affected by the budget.
Press coverage of the Budget seems to fall into three main categories:
- ‘taxes are theft’ or ‘taxes will be extremely high’ – this was the line taken by the Telegraph, The Times, the Sun and the i;
- ‘spend now, pay later’ – the line taken by the Financial Times, and the Guardian;
- ‘this is all very risky’ – the line taken by the Metro.
The Express and the Mirror took a different tack from the rest, with the Express saying, “Our recovery begins today” (and also talking about a ‘tax-grab’) while the Mirror chose to focus on “All-out war at Palace.”
The Budget itself talks about ‘fiscal repair measures’ and spends an enormous amount of emphasis on debt sustainability:
“The crisis has led to a significant increase in public sector debt. While interest rates are currently forecast to remain low, there is a risk that they could rise sharply, which would have significant consequences for the affordability of debt.”
As we have written before, this alarm about the ‘state of public finances’ does not reflect the reality of those finances – even today, the ratio of public debt to GDP is not ‘staggeringly high’, ‘worryingly high’, or even ‘rather high’ – it is almost exactly the average for the last 300 years. Which means that this government has as much flexibility to spend as the average government.
Furthermore, the idea that the government should run a balanced budget is economically illiterate. There are few cast-iron laws of economics, which is one of the reasons why making forecasts is so difficult, but there is at least one: the law of sectoral balances.
Although the name is slightly scary, the idea is quite simple. The sum of these three numbers will always be zero (we explained why here):
- The UK Public Sector surplus (/deficit if it is negative) – this relates to government spending and taxation;
- The UK Private Sector surplus (/deficit) – this relates to households and businesses;
- The Foreign Sector surplus (/deficit) – the rest of the world’s surplus is our trade deficit and vice versa.
The UK has had a persistent trade deficit for over two decades and is projected to do so under the Office for Budget Responsibility projections – to the tune of at least 0.5% of our GDP. In other words, the Foreign Sector surplus is around +0.5% of GDP. That means that the sum of the UK Public Sector and Private Sector surpluses must equal -0.5% of GDP and if the government runs a surplus, the Private Sector must run a deficit of at least 0.5% of GDP. This is a significant part of the reason why austerity is so damaging to the economy.
Most concern about the state of government finances ignores not only these points above – which are critical to the health of the economy – but also the facts that:
- UK bond rates remain near all time lows – the government can, for practical purposes borrow for nothing;
- The UK borrows at very long timescales — longer than other countries – so our debt will not suddenly come due;
- Most of our recent borrowing is effectively money the government owes to itself (the Bank of England) and is entirely under its own control.
Finally, this inappropriate focus distracts from the key things the Budget should be delivering – like inclusive, green growth. In reality, our ability to spend and invest is constrained by the real resources in our economy, not by an inability to fund the spending and investment.
So when the Nadine Dorries, Minister for mental health, suicide prevention and patient safety says on the subject of giving a long overdue pay-rise to nurses, “But the 1% [which is a pay cut, once inflation is taken into account] is what the government can afford, it is what the offer is, and it would be wrong to say that a single person in the government does not appreciate the effort of nurses, we absolutely do,” she is simply not reflecting the reality of what is affordable.
As John Maynard Keynes commented in 1942,
“Assuredly we can afford this and much more. Anything we can actually do we can afford. Once done, it is there. Nothing can take it from us. We are immeasurably richer than our predecessors. Is it not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life?”
His comment remains true in 2021.
This is Not The Budget the UK Needs
How the budget looks
A budget represents a portfolio of policies on both spending and taxation. And each individual policy is complex. But, as Chapter 15 of 99% describes in detail, and this article in outline, there are only four fundamental types of policy:
- Type I: captured growth policies;
- Type II: shared growth policies;
- Type III: vulture policies;
- Type IV: balancing policies.
When we use this framework to analyse the 2021 budget, we get a picture like this:
The reason for the UK’s low growth and mass impoverishment over the past decade is that we have had far too many captured growth policies and vulture policies and far too few shared growth policies and balancing policies. As the diagram above indicates, this budget follows that pattern.
Let us start with the type I captured growth policies. The corporate tax super deduction may spur growth – to the extent that it incentivises companies to invest more than they would otherwise – but the benefits of this growth are unlikely to be shared across the population as a whole. Support for first-time buyers runs the risk of pushing up house prices rather than increasing the supply – and again the benefits are unlikely to be shared widely. The levelling-up fund should be shared growth policy, but there have been serious questions about its targeting both geographically and in terms of who the beneficiaries would be within the areas receiving assistance. Indeed the FT decscribed the bias in selection of areas to ‘level up’ as ‘pretty blatant’.
The significant spending on COVID support is a shared growth policy (though not comprehensive in its support – those excluded from the initial scheme still seem set to be excluded in future), but it is temporary.
The budget contains several vulture policies which will neither grow the pie nor share it fairly. It proposes a real terms cut in public sector pay: public servants will get poorer over time. It introduces a freeze to tax thresholds which will, of course, hit those whose earnings creep above the thresholds. It includes a further 4 billion reduction in departmental spending, which will cause a reduction in GDP. And it has cancelled the green homes grant which would have been beneficial to both the environment and the economy.
There is little in the way of balancing policies – but the future rise in corporate tax rates could be used to fund such a policy.
Overall, if there is a vision for the future in this budget, it is not for a clean, green, prosperous United Kingdom.
As the Social Mobility Commission commented,
“While we welcome the extension of the £20 uplift to Universal Credit and other measures aimed at helping those who have been hardest hit by COVID, we hope to see more focus on socio-economic inequalities in the Autumn statement. The poor and the young will suffer most from an economic downturn – they need to be put at the heart of every policy and financial decision the government makes in the coronavirus recovery plan.”
How the Budget Should Look
How might the budget look if its principal objective had been to deliver against Boris Johnson promise of creating a clean, green, prosperous United Kingdom?
Certainly, COVID complicates the situation enormously – and we do not yet know how much ‘scarring’ (i.e. permanent damage to the economy) it has caused. On the assumption that the COVID support schemes so far have been successful, then the capacity of the UK economy remains much as it was in 2019.
Here is a picture of that economy.
The horizontal axis shows each sector’s contribution to the roughly £2 trillion GDP of the UK while the vertical axis shows its contribution to the roughly 450 megatonnes of CO2-equivalent emissions.
Roughly 75% of GDP is in sectors which could, with only minor transformation, become carbon-neutral or even negative. Stimulating these sectors, with the right incentive structure, would be good both for the economy and for the environment. Most of the rest could be transformed over time – and therefore should be, if the aim of creating a green economy is serious. Only a negligible proportion of the UK’s economy is in sectors which cannot be transformed.
So if the vision really were to create a clean, green, prosperous and fair UK, we should expect to see a budget looking far more like this:
The balance of policies is completely different. There are no vulture policies, but conversely there are far more shared growth policies and balancing policies.
In reality, Sunak’s budget represents a continuation of the kind of thinking that brought us mass impoverishment. But that is not what the people of the UK want to see.
As the i newspaper put it,
“Austerity is back, and there is no reason to believe that the voters have regained their appetite for it since 2017, not least because some of the cuts, particularly to local government, have never stopped.”
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