The Budget: Politically significant but economically questionable
Mr Sunak’s presentation was very slick, making the most of his obvious charisma. He sounded appropriately serious about facing the challenges of COFID-19 and the Government does indeed seem to be working closely with the Bank of England. The Bank’s measures announced earlier today are mainly about providing liquidity but the interest rate cut, together with Mr Sunak’s micro proposals should really help many SMEs and even the self-employed.
Nevertheless, it was something of a shock to listen to the Chancellor’s determination to reverse the policies of Messrs Osborne, Hammond and (briefly) Javid in favour of big spending and big borrowing. It certainly puts the Labour Party on the spot unless one remembers which party has for the last 10 years been cutting public services and failing to focus on either public or private investment. Austerity has now had its day and even current spending will for the next few years outstrip current income before taking account of capital spending.
Understandably, neither the Government nor the independent Office for Budget Responsibility have yet been able to assess the economic impact of COVID-19 but this makes the GDP and tax revenue forecasts look much too optimistic. A recession in the UK now seems inevitable in 2020 (the ONS published very soft GDP numbers this morning for the period up to the end of January: i.e. pre-COVID-19). Mr Sunak did coyly allude to this possibility while using the epidemic as a reason to delay detailed announcements of very ambitious investment plans (up to £600bn over the next 5 years). There were some nuggets referring to broadband (4G), potholes, affordable housing, electric car charging points and carbon emission reduction.. HS2 got a plug as did Northern rail links and a £27bn programme for strategic new roads. However, the Government will struggle to spend its target of £175bn in the current year, which casts further doubt on the GDP growth forecasts. Otherwise, there was lots of minor tinkering reminiscent of Gordon Brown's budgets.
Global financial markets continue to be all over the place, especially in the US, and the Budget appears to have had little direct impact on UK equities, gilts or the pound. Mr Sunak should probably settle for that!