Britain’s chancellor Rishi Sunak is set to mark a break with a decade of austerity on Wednesday. The new chancellor, appointed last month after his predecessor Sajid Javid clashed with the prime minister, will unveil a Budget whose centrepiece is likely to be new spending announcements. With the negotiations on a post-Brexit trade deal with the EU and, even more, the coronavirus epidemic threatening to create a drag on the economy, this is the right approach: fiscal policy should support growth through a difficult year.
Yet this conflicts with the government’s spending rules. While these allow the government to borrow for capital expenditure, day-to-day spending is to be financed out of taxation. Downgrades to productivity forecasts, previously-announced spending decisions and accounting changes to the treatment of student loans all mean that, under the current rules, there is no room to spend more on public services without raising revenues.
This time, though, higher current spending need not be balanced by tax increases. Instead, facing so many economic headwinds the government should relax the fiscal rules, borrow — within sensible limits — and spend in order to strengthen the economy. Gilt yields have fallen sharply as fear over the economic impact of the coronavirus has spread; markets are relaxed about the prospect of higher UK debt.
The global economy may well be heading into its first recession since the financial crisis. Even in a benign scenario where the coronavirus does not spread as far as anticipated and fades away as winter ends, the damage to growth from the prolonged shutdowns in China and northern Italy alone could hit employment, wage growth and living standards. In those circumstances, especially with interest rates already low, fiscal policy should favour supporting the economy.
The extra spending should be carefully targeted. Investing in infrastructure to help raise productivity is sensible. But more money for services including education, particularly for those who do not go to university, will also be needed to “level up” the country. Funding for the National Health Service will be vital to help services to cope with the disruption caused by Covid-19. Local authorities need a helping hand after bearing the brunt of cuts over the past ten years.
The government should also ensure those in precarious employment have the support to be able to take sick leave. It has already said statutory sick pay will begin immediately rather than after four days, but this does not go far enough for the self-employed and contract workers — many of whom cannot afford to take even a day off. Britain’s social safety net was designed for an era of steady manufacturing employment, not an insecure gig economy.
An expansionary Budget does not mean the government should waste the opportunity provided by a new parliament and a large majority to launch tax reforms. Modest tax rises this time could pave the way for more in the October Budget if the current economic turbulence abates. A surcharge for overseas home buyers, and ending the nearly decade-long freeze on fuel duty as well as entrepreneur’s relief are all good candidates. Scrapping subsidies on fuel for farmers and construction workers is a sensible measure to tackle climate change, but needs to be carefully handled. France’s gilets jaunes protests are a cautionary tale.
Low interest rates and a struggling economy are not an excuse to abandon fiscal prudence altogether. But the multiple headwinds the country is facing justify, for now, a careful relaxation of the rules.