Wednesday 11 March 2020 was a momentous day not only for Rishi Sunak, but for the UK and the world. It was the day Sunak delivered his first budget as chancellor of the exchequer. But it was also when the World Health Organization declared a global pandemic as cases of Covid-19 soared.
In his budget, Sunak threw the huge sum of £30bn at Covid-related support. He told the Commons: “There is likely to be a temporary disruption to our economy. For a period, it’s going to be tough.”
Much of the rightwing press was still in joyous Brexit mood and, perhaps understandably, failed to see the enormity of the moment and extent of the disaster to come.
“Rishi’s marvellous medicine” was how the Daily Mail greeted his spending spree to combat Covid on 12 March, as if it were a challenge the omni-competent new star of the Conservative party could tackle with ease. “Rishi: the teetotal chancellor who is the toast of post-Brexit Britain”, said a light-hearted headline in the Daily Telegraph.
This Wednesday, after 12 months in which 122,000 people in the UK have lost their lives to Covid, the total cost of measures announced by Sunak on virus-related spending will – in all probability – exceed £300bn, fully 10 times the massive sum pledged a year ago.
That will not be the end of it. Tens if not hundreds of thousands of businesses are close to bankruptcy. On high streets, shops, restaurants, pubs and hairdressers remain closed in a third lengthy lockdown. The costs stretch far into the future as ever more financial life support is needed and the threat of mass, long-term unemployment grows, hovering over a generation of young people. As we report today, Sunak will pledge a further £5bn to help businesses on the high streets. The pain is real and the money needed.
This is easily evident in the east London borough of Redbridge, where the manager of a local pawnbroker is frank about the difficulties.
“We’re just winging it, trying to get through,” said 51-year-old Dave, wincing as he contemplated the future of his business. After a year of planning, Cash Concepts arrived in Redbridge on 5 December, shortly before Redbridge was placed into tier 4 restrictions. It was a tough start and it has been downhill ever since. “People can’t even come in to browse,” he said motioning to the desk blocking the store entrance.
Across Barkingside High Street is its competitor, H&T Pawnbrokers. Staff were sitting behind a Perspex shield and though customers are allowed to enter, none was present yesterday.
Manager Ranjit described it as “quiet” with knowing understatement. He said: “We’re here for the customers, people need money. A lot of people are getting laid off and people are on furlough.”
At Papa John’s Pizza, staff said business was roughly the same as 12 months ago despite a number of factors changing the customer profile. A staff member said: “The stay at home message helped us: people are afraid, they order takeaway food and there is less competition, no restaurants are open and this has been good. But there is less money around, people are starting to get scared as jobs go and they might not buy as many pizzas in the future.”
So, in the words of one Tory MP, there is a sense that Wednesday will be a sobering day: “I think this is the moment when we really will confront the hard financial realities of all of this. So far, it has been about handling a public health disaster. This budget will be a fork in the road, when we see financial consequences and painful choices we have to make as politicians.”
A senior Treasury official emphasised that Sunak’s themes would be “support” for the economy through the remainder of the pandemic, “recovery” after it, and “honesty” about the bills that will inevitably be in the post for some time to come.
In an interview published in the Financial Times yesterday, Sunak said: “When I got the job, I had three weeks to prepare a budget. I thought it would be the hardest thing professionally I would have to do in my life. It turned out, probably, to be the easiest thing I did in my first year in the job. It has been a tough year. There was no playbook. We had to move at speed and scale.”
It has been a tough year. There was no playbook
The sheer scale of that unforeseen spending, and the way it has propelled government borrowing to the highest levels seen in the UK in peacetime, will be an unavoidable, underlying and, for some, scary theme of the budget speech.
For Tories brought up on Thatcherite economics and more recently on George Osborne’s pledges to run a budget surplus –he wanted to balance the books by 2015 and then move into the black – it will be a different economic reality altogether. The most recent figures show the deficit – the difference between what the government spends and what it receives in taxes – stood at £8.8bn in January. It is the first January deficit in 10 years and the worst since modern records began, as January is usually a key revenue-raising month because it is when taxpayers submit their self-assessment returns.
This means the deficit will hit between 13% and 14% of the gross domestic product (GDP) measure of the size and health of the economy, which far outstrips the huge 9.8% following the recession of 2009.
The City bank ING said it expected the deficit in the next financial year to remain in high single digit figures. Its chief economist, James Smith, said an extension of the furlough scheme, which currently covers 4.7 million workers, subsidies for industries still affected by restrictions, and the impact of rising unemployment will all eat bigger holes in Whitehall budgets.
In the hospitality sector and among other consumer services, where restrictions will remain well beyond the summer, alarm bells are ringing louder than ever. More than half of these firms are now reporting they have less than four months’ cash in reserve, according to the Office for National Statistics.
Smith said: “While it’s hard to know how these figures compare with pre-pandemic norms, the fact that a third of hospitality firms say they have little or no confidence they can survive the next three months is striking.”
Ian Stewart, chief economist at the accountancy firm Deloitte, said the UK had a particular problem when the government was forced to shut face-to-face activities, adding: “As a consumption-heavy economy, the UK has been especially badly hit by lockdowns. More than that, an unusually high proportion of UK consumer spending – 21%, more than in any other G7 nation – goes on so-called socially consumed services such as meals out, leisure activities and holidays. Lockdowns have put paid to such spending, reinforcing the UK downturn.”
Last week, 388 business leaders supporting the Fighting Back for Business campaign led by Simon Dolan, the founder of Jota Aviation, wrote to the chancellor calling for debts accrued through government-backed loans to be written off for small and medium-sized firms.
Niall Douglas, managing director of Full Circle Travel, a travel consultancy, said: “The travel industry is facing an existential crisis with the prospect of recovery potentially stretching for years and Brexit difficulties continuing to blight the hopes of many operators.”
Given that Sunak needs to maintain support for businesses trapped in lockdown, continue to fund 4.7 million people on furlough, pay the mounting benefits bill (he will extend the £20 a week uplift for those receiving universal credit) – not to mention fund the NHS – what could his strategy be to prevent spending surging even beyond what has historically been seen as acceptable in his own party?
If it were simply a question of economics, the task would be hard enough for a Tory chancellor. But after a general election that Boris Johnson won after turning dozens of seats blue in “red wall” Labour areas of the north and Midlands, the challenge is even more daunting.
David Gauke, a former treasury minister, said: “At the last general election, the Conservative party was able to unite a coalition of voters – those from more affluent seats and those in ‘red wall’ seats – around Brexit. But it is much more difficult to do so around issues of economics and how we pay the bills for the pandemic. I think that is a large part of the problem that Rishi Sunak will face on Wednesday.”
The last thing Tories in deprived “red wall” areas want is for their government, which promised to “level up”, to now impose cuts and tax rises, particularly on the small businesses that keep their towns and cities alive. With Sunak said to be considering rises in corporation tax, the Tory MP for Carlisle, John Stevenson, is one of many who says such increases must be avoided if they would hurt areas like his. He insisted yesterday it was too early to push up taxes and emphasised that generous support would be needed for months to come.
In a move that also highlighted the issues for Sunak, a predecessor in the job, Kenneth Clarke, yesterday floated the idea of increasing taxes on older, wealthier people still in work – which will not please many other Conservative MPs and their constituents. Clarke said the pandemic had been unfair financially on “the poor, the young, the low-paid, the vulnerable”. He suggested making people who continue in full-time work after state pension age – who do not currently have to pay national insurance contributions – pay the same as younger people.
Sunak has made it clear he plans to begin reining in spending and bringing down the deficit before the year is out. But will he be able to do that and would doing so make economic sense? This same debate preoccupies economists and governments across the world. Here in the UK the centre-left thinktank, the IPPR, said Sunak should stick to an expansionary outlook, deny oxygen to any backbenchers who worry about debt, and spend big over the rest of the parliament, mimicking the Biden administration’s plans for a $1.9tn spending spree. It suggested that £190bn of public investment and anti-poverty measures would give the lift needed to overcome the inevitable shake-out from the disease that will see many businesses go to the wall.
Sunak is not, however, a natural spender and will fear the inflationary effect of any spending spree that could lead to sudden growth spurts and the threat of interest rate rises. In the budget, his anxiety about rising inflation, and the possibility that central banks would need to increase interest rates to calm rising prices, will be central.
Other economic and political balances have to be struck. No 10 is wary of allowing a lopsided recovery that sees the well-off jetting from one restaurant to another while others see reductions in their disposable incomes as a result of rises in taxation, including council tax.
That is why signals have gone out from the Treasury-No 10 joint policy unit that taxes on wealth – capital gains tax and inheritance tax – and a hefty hike in corporation tax, will target those households and businesses that have profited from the pandemic.
But again such moves will run into opposition not only from Tories concerned about hitting the rich but also the Labour party, whose leader, Keir Starmer, has said it is too early in the recovery to consider tax rises of any kind. As a former Tory cabinet minister put it: “It is not just the economics of this budget that are seriously daunting because of the pandemic. It is the politics of it that are equally nightmarish.”
Keep an eye out
A revamped “Help to Buy” scheme that provides cash-strapped first-time buyers with a Treasury-backed loan guarantee on properties worth up to £600,000. Likelihood: 10/10
A holiday from paying stamp duty on the sale of homes up to £500,000 in England and Northern Ireland, exempting almost nine in 10 transactions, could be extended for three months. 9/10
The furlough scheme and grants for the self–employed will be extended until at least June when most pandemic restrictions are lifted. 10/10
The chancellor is considering an increase in the headline corporation tax rate from 19% to 20% in the autumn and possibly to as much as 25% by the end of the parliament. 7/10
A freeze on the amount wealthier people can put into their pensions tax-free at £1m. 8/10
Around £5bn could be saved by freezing tax thresholds, pushing more people into higher rate tax brackets. 8/10
A Treasury adviser says capital gains tax rates of between 10% to 18% on company share sale profits and 20% to 28% tax on property gains should match the higher rates for income tax of 20% to 45%. 5/10
A £20-a-week boost when the pandemic hit could be extended for six months to provide poorer families with support while restrictions remain in place. 8/10