Fall Budget Must Show Financial Firepower Behind ‘Race to the Top’ | Richard Partington
BRitain’s economic recovery from the lockdown has stalled and inflation is on the rise. As fall approaches, prophecies made earlier this year of increased consumer spending appear to have faded, washed away by the wettest summer of the decade.
Everything was supposed to have been so easy for the Chancellor, Rishi Sunak. The lockdown has helped households save over Â£ 200 billion and has left consumers eager to reopen pubs, bars, restaurants and shops.
With such vital growth ingredients, a tight fall budget to cut back on emergency pandemic support would prove painless to administer.
Reports are seeping through that Sunak is talk about a difficult game ahead of the Triennial Spending Review and next month’s fall budget, which will be used to define the post-Covid fiscal and spending landscape until the next general election.
After Boris Johnson’s cabinet reshuffle last week, the Tory election winning machine is on full swing.
Yet when it comes to taxes and spending, the message is completely different. Cabinet ministers are warned against meager spending regulationsSunak is expected to set new fiscal rules in the next budget – designed like an iron cage to prevent government spending madness.
It will be music to the ears of Tories who fear Johnson’s lavishness will damage the party’s reputation for prudent management of public finances, after the Prime Minister’s Â£ 12bn raid on national insurance to fund health care and social care.
Yet this background music comes as the UK economy enters a difficult period. Gone are the reports of rapid growth and pent-up demand for goods and services after the lockdown. Instead, the most severe shortages of workers and materials since the 1970s are holding back growth, while consumer spending has leveled off at best.
Business leaders are increasingly frustrated by the government’s lack of response. Far from being supported, the bosses have been warned of a tax hike that could harm job creation and investment.
Economists say there’s more than a whiff of stagflation sweeping through Britain, reminiscent of five decades ago when blackouts and the three-day week stalled the country’s growth engine.
In this context, Sunak brandishing the specter of severe action on public spending makes sense to budget hawks. The government will remove spoonfuls of demand from the economy next month; end holidays, cut hospitality VAT reductions and cut universal credit benefits as part of social security’s biggest overnight cut.
Treasury sources say inflation is one of the many risks the Chancellor is watching closely, and demonstrates why public finances need to be back on a sustainable footing. Forecasts suggest that a sustained one percentage point rise in inflation and interest rates would add Â£ 27.8 billion to debt servicing costs by 2025.
Inflation hawks argue that weakening household purchasing power could keep prices from skyrocketing. However, much of the explosion in price pressure is due to rising costs of production, rather than demand – “cost inflation” – fueled by Brexit and the continued disruption of the market. Covid.
Meanwhile, rather than tackling demand, Sunak could consider ways to increase Britain’s production capacity to hedge against inflation.
And here there should be a simple and politically expedient solution: level up. Instead of cutting back to prove a doomed fiscal prudence point, now is the time for the government to finally show that its flagship phrase has some substance. It would be much safer in the long run.
Britain is one of the most imbalanced economies in Europe, with larger regional productivity gaps than in Bulgaria and the Czech Republic. Some economists believe it will take funding on a scale similar to the nearly Â£ 2 billion spent on German reunification after the fall of the Berlin Wall to close the gap.
Despite the costs, the gains would be substantial. Improving regional productivity could add Â£ 200 billion for the economy over the next decade. Meanwhile, increasing the UK’s supply capacity and reducing companies’ production costs would ease inflationary pressures, raising the economy’s speed limit.
As the budget approaches, there are signs of an increased appetite to focus on the upgrade program.
But government ministers are too fond of saying that they are going to “level the whole of the UK”, completely missing out on their own ill-defined policy. It is about bridging the gaps between communities, and not about adding to the whole economic pie while maintaining deep-rooted inequalities.
By putting Michael Gove as head of the Housing Department, with responsibility for leveling, the government’s intention is to show renewed will.
Yet it is also ironic, after the damage done by the former secretary of education to the life chances of low-income families. Gove’s arrival as education secretary in 2010 kicked off a decade of per pupil spending in England collapsed 9% in real terms, in a regulation that entrenched regional differences.
Bringing in former Bank of England chief economist Andy Haldane is a more cautious move. He was one of the government’s fiercest critics for its rudderless leveling program, warning that the plan would fall flat if it relied too much on infrastructure spending and one-off funding programs controlled by Westminster.
However, he will only lead the new upgrade working group for six months. This is hardly ideal and fails any of the three key tests for the leveling implemented by Haldane in his former role as chairman of the industrial strategy board: longevity.
Rather than displays of short-term commitment, task forces, and new leaders, the substance of the leveling will require financial firepower. In terms of the budget, Sunak needs to ramp up.