Chancellor Rishi Sunak's second Budget was probably easier to put together than his first in March last year and indeed the measures introduced over the numerous fiscal events in between. Today's exercise aimed to strike a balance between keeping the economy running in the short-term and maintaining credibility over the public finances further ahead. The extension of the pandemic measures is expensive. The OBR now considers the aggregate cost of the various programmes to be £344bn and it has revised up its forecast for public sector borrowing for 2021/22 by £70bn.
But we judge that the Chancellor has broadly done the right thing. By supporting the labour market and various individual sectors until the economy is better able to stand on its own two feet, he is minimising job losses, company failures and longer-term economic "scarring". That said, we note the OBR’s assessment that the size of the economy is expected to be 3% smaller in five years’ time than it would have been in the absence of the pandemic. We hope that some of the Chancellor’s measures such as the "super deductions" from corporation tax will help to raise productivity levels.
Despite a still highly challenging environment, various factors have helped to limit the deficit this year and offer scope for faster growth looking forward.
First, the fast pace of Covid vaccinations reduces the risk of an interruption to the PM's roadmap for reopening the economy.
Second, as the economy has been "closed" and most incomes protected, households’ deposits have ballooned. We estimate the level of "excess" savings reached £108bn in January, equivalent to 9% of consumer spending this year.
It is not clear whether the Chancellor will have to take any further fiscal action in the next Budget this autumn. He will doubtless avoid doing so if at all possible.
Third, the ONS has tended to revise last year's GDP levels up and the level of government borrowing down. With the OBR now estimating public sector borrowing to be £355bn, from £394bn in November, the fiscal situation looks less acute than estimated four months ago.
Last, the Bank of England's QE programme has helped to lower borrowing costs as well as deal with the dysfunctional market background. Clearly, the second wave of the pandemic and the third lockdown has not helped but it is important not to disregard these factors.
From this point it is not clear whether the Chancellor will have to take any further fiscal action in the next Budget this autumn, bearing in mind the increases in Corporation Tax rates and the freezing of personal income tax allowances. He will doubtless avoid doing so if at all possible and hope that faster than expected growth does the job for him. But, of course, much depends on the evolution of the pandemic. At some stage over the next couple of years we expect talk to surface about tax cuts, as the 2024 general election comes into view.
Last, the Chancellor updated the remit for the BoE’s Monetary Policy Committee. This involved re-confirming the 2% CPI inflation target. However, it also included a line to state explicitly that the government’s economic strategy is for "environmentally sustainable" growth, "consistent with the transition to a net-zero economy". In practice, the Bank appears inclined to incorporate climate change screening in its corporate bond purchases to reflect this change. A refreshed remit was also published for the Financial Policy Committee, including "Building Back Better" and "A new chapter for financial services", as well as climate change issues.
