As the first Budget presented after the UK’s exit from the EU, today’s fiscal statement was always going to have particular symbolic significance. But its importance has been further amplified by the rapidly evolving Covid-19 epidemic and its financial and economic impacts.
In short, today’s Budget sought to balance a pragmatic and compassionate response to the near-term public-health emergency with the fiscal underpinning for a longer-term vision of a more productive and geographically balanced UK economy.
With the uncertainty around the UK’s formal EU exit date finally removed, the public finances are now unexpectedly subject to a very different type of uncertainty: that pertaining to the spread of Covid-19 in the UK and in numerous key trading partners and neighbours, and the possible impact on UK economic activity and financial markets. Accordingly, the macroeconomic framework within which the public finance proposals were presented is challenging. The Office for Budget Responsibility (OBR) has revised down its forecast for real GDP growth this year, from 1.4% previously to 1.1%. Growth is expected to recover to 1.8% in 2021, and to average 1.4% a year over 2022-24. And the risk to these forecasts is on the downside, given the likely impact of the Covid-19 epidemic on exports and consumer spending in particular; the hospitality, distribution and transport sector, which will feel the impact of the epidemic most acutely, accounts for nearly 20% of the UK economy, and as the Chancellor noted, a short-term decline in demand will be unavoidable. (The OBR’s economic forecasts do not take into account the potential impact of Covid-19.)
Recognising this downside risk, today saw a rare instance of coordinated monetary and fiscal policy with the Bank of England’s decision to cut the benchmark interest rate by 50 basis points to a record low of 0.25%, and to relax conditions for banks to mitigate the potential effect of the epidemic on lending to the economy. Although the monetary easing will create more favourable borrowing conditions for the government, the enormous increase in public spending announced today will inevitably put more pressure on the ‘fiscal rules’ announced in November 2019, to which—despite considerable speculation to the contrary—the Chancellor has committed to adhere. These pledge to have the current budget in balance by 2022/23 and to cap public-sector net investment to 3% of GDP.
But today’s Budget signalled a decisive shift away from a fiscal policy oriented principally towards debt reduction towards one focused on economic stimulus and long-term investment. Public-sector net borrowing is now expected to rise to £66.7bn in 2021/22 from £47.4bn in 2019/20, compared with the March 2019 forecast which projected a decline from £47.6bn to £37.6bn over the same period. However, because nominal GDP is expected to grow more quickly than the debt level, public sector net debt in relative terms is forecast to decrease from 79.5% of GDP in 2019/20 to 77.4% in 2020/21 and then to stabilise at around 75% over the remaining four years of the forecast period.
We strongly welcome the decision to invest heavily in infrastructure; the £639bn that has been budgeted for infrastructure and other investment spending over the five-year parliament is a considerable element of what the OBR termed “the largest sustained fiscal loosening since…1992. TheCityUK has long advocated the prioritisation of physical and digital infrastructure upgrades to connect and transform regions and nations. We have consistently highlighted the fact that well-targeted infrastructure investment supports both near-term output and employment and longer-term productive potential, and given the consistent wide disparity in productivity among UK regions and nations, we hope that the investment announced today will, over time, help to narrow this gap.
We have also long been a proponent of greater devolution of political powers. Devolving power to a clearly and tightly defined ‘place’, be that a city region, sub-region or a major new town, can ensure decision making takes place at close proximity and in continued dialogue with the local industry cluster. To this end, we welcome today’s announcement of a devolution deal for West Yorkshire—an area with a population of more than 2m—as well as the allocation of additional funding for new city and growth deals, and of an extra £640m for the devolved Scottish government, £360m for Wales and £210m for Northern Ireland.
Our Budget representation cited tax policy as an important area where the UK’s global competitiveness could be enhanced. We recommended that the UK undertake a holistic review of the tax system and consider whether, and where, improvements should be made. Today’s decision to increase the threshold for National Insurance contributions to £9,500 will—all other things being equal—improve the finances of the UK’s least-well-off residents. However, we hope the government will recognise that the maintenance of an internationally competitive tax system is dependent on multiple factors, not only headline tax rates. We hope that the government considers further adjustments to the tax regime in the financial services white paper to be published in the spring, and in the autumn Budget; these should prioritise the pursuit of a clear and coherent overall approach to the tax regime, as well as the longer-term stability of the system, with future changes introduced in a measured fashion following engagement and consultation with key stakeholders about the possible intended and unintended consequences of new legislation.
 Office for Budget Responsibility, ‘Economic and fiscal outlook’, March 2020, available at: https://cdn.obr.uk/EFO_March-2020_Accessible.pdf
 Output per job in London was nearly £80,000 in 2018, whereas it ranged from approximately £45,000-60,000 in regions and nations other than London. Data from Office for National Statistics,’Region by industry labour productivity’, (5 February 2020), available at: https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/datasets/industrybyregionlabourproductivity