Rishi Sunak’s first Budget, just four weeks after he become chancellor, is set against the backdrop of potentially the biggest public health emergency in generations.
With an uncertain economic environment and a high likelihood of coronavirus upending the economic forecasts before the Budget ink is dry, the Treasury has conceded that “we’re looking at a challenging economic context”.
The chancellor has therefore limited his ambitions and his Budget will focus on setting out plans to meet specific Conservative party manifesto commitments, putting in place a strategy to level up underperforming parts of the UK and ensuring Britain is prepared to fight coronavirus.
Mr Sunak’s other ambitions will wait for a spending review and a second Budget later in the year, in what officials describe as a “trilogy” of budgetary events for 2020.
Here are five things to look out for on March 11.
The economic context
Because there was no Budget in 2019, the government’s existing forecasts — which date from March last year — are more out of date than usual. Revisions would be large even if there were no changes in policy.
The independent Office for Budget Responsibility, which produces the official forecasts, is likely to downgrade the amount it expects the UK economy to be able to grow over the next five years. It will link this to weaker levels of immigration than it previously forecast as a result of the government’s new points-based immigration system, and weaker employment growth due to sharp rises in the national minimum wage.
The spread of coronavirus came too late to be formally included in the forecasts, although the OBR will include commentary on how much the disease could damage the economic outlook and whether this is likely to be temporary or permanent. The OBR is unlikely to downgrade the growth outlook specifically for the reality of Brexit.
Offsetting these downgrades will be extra short-term growth coming from sharply rising public expenditure, creating a different profile for the public finances before the watchdog takes account of budget changes. Government borrowing will be revised down for 2020-21, but will be higher than previously expected later in the five-year forecast period.
Gemma Tetlow, chief economist of the Institute for Government, said the likely economic profile would give Mr Sunak “little room for manoeuvre” if he wanted to meet his budgetary rules.
The Budget package
This Budget will mark the moment the Conservatives put the final nail into austerity’s coffin. Much higher public spending — both day-to-day and capital expenditure — will force up public borrowing. Instead of net borrowing falling to 1.3 per cent of national income by 2023-24, it will be on course to rise close to 3 per cent.
The Budget will demonstrate that the increases in the 2019 spending review for 2020-21 will be maintained in subsequent years, and these will come alongside large rises in public sector net investment.
The result of these spending increases, which will be by far the largest policy changes in the Budget, will increase borrowing in every year of the forecast. According to Isabel Stockton, economist at the Institute for Fiscal Studies, even without these changes, the underlying public debt burden “will no longer be falling and will be slightly rising”.
The Treasury acknowledges it will be very difficult to hit its manifesto pledge to balance the current budget within three years and is looking at changing the definition of this rule to give itself more wriggle room.
Mr Sunak wants to use the Budget to demonstrate that his party takes its election promises seriously, and he will act upon a number of tax commitments from the Conservatives’ manifesto. He will scrap the planned cut to corporation tax from 19 per cent to 17 per cent, raising £6bn a year, and entrepreneurs’ relief in capital gains tax will be scaled back or abolished. There will be a review of business rates and the government will go ahead with the digital services tax aimed at the likes of Google and Facebook.
As part of the government’s commitment to net-zero carbon emissions by 2050, it will begin a process of raising environmental taxes with higher duties for red diesel — the fuel used in agriculture and construction.
With a manifesto pledge to freeze the main rates of income tax, value added tax and national insurance, the big question for Mr Sunak is how far to go on the promise to limit “arbitrary tax advantages for the wealthiest in society”.
Marissa Thomas, head of tax at PwC, said that “reliefs will come under the spotlight” in the Budget. Expect tax rises to fall into this category, although perhaps not restrictions on tax reliefs on pension contributions or mansion taxes, which were floated this month and sparked outrage on the Tory backbenches.
Mr Sunak will put in place a capital spending programme that will increase public sector net investment from close to 2 per cent of gross domestic product to nearly 3 per cent by 2025, the highest rate of sustained capital expenditure since the 1970s.
This will form the centrepiece of the government’s strategy to level up underperforming parts of the UK economy. With the investment plans in the public finances — financed by additional borrowing — Mr Sunak will use the Budget to announce the allocation of these funds for specific projects, including a £5bn package to improve broadband in poorly served areas.
He will not specify how all the £100bn for capital expenditure promised in the manifesto will be allocated in this Budget, leaving opportunities to hand out cash for more new investment projects later in this parliament.
Mark Gregory, UK chief economist at EY, said it would be challenging to manage the “resources and capabilities available to deliver” the planned rapid increase in capital spending.
The Budget will be written with public health security at its heart, and the chancellor has said he will not let public finance rules stand in the way of providing health resources and other measures necessary to deal with the gathering crisis.
Apart from additional resources for the NHS, Mr Sunak is working on “targeted” measures to ensure companies have time to pay bills and do not face bankruptcy as the result of a temporary downturn in business.
He will be keen to show he is ensuring Britain has a best-in-class response to the crisis and will work with the Bank of England, financial regulators and industry to limit the economic fallout of coronavirus as far as possible.
Ahead of the Budget, on The Andrew Marr Show, Mr Sunak said: “We will provide the funds to get through this.”