Six things we learnt from budget 2020
In the run-up to the budget, Dr Gemma Tetlow laid out six things she was looking out for and has since assessed what we learnt.
1. Fiscal rules
Will Rishi Sunak stick to Sajid Javid’s fiscal rules?
The fiscal rules were the dog that did not bark in Rishi Sunak’s first budget. The past few weeks were riddled with speculation that weaker-than-expected growth and the Johnson government’s desire to increase support for public services would lead Sunak to water down the fiscal commitments made in the Conservative’s 2019 election manifesto. The rules allow plenty of scope for extra investment spending – but sticking by the pledge to balance the current budget within three years appeared to leave him somewhat hamstrung on day-to-day spending.
But in the end, Sunak managed to adhere to his predecessor’s rules while being fiscally generous – not least by adding £31bn a year to day-to-day spending for public services by 2022/23. The spending increase is, in reality, a bit less dramatic than it first appears: around £13bn a year of that figure had already been announced in last year’s spending review, and some of the extra money (perhaps around £4bn a year) will be needed to replace spending programmes that the EU used to fund. But it still amounts to a big spending uplift. How was that possible?
In part, because the economic and fiscal forecasts from the Office for Budget Responsibility (OBR) have not been downgraded as much as some had predicted. This reflects a number of offsetting factors. The OBR now takes a dimmer view of prospects for productivity growth in the UK than it did in its last forecast a year ago, and assumes that the government’s new stricter regime for EU migration will also constrain growth. But the government’s increase in spending and higher forecast labour-force participation both boost economic growth, while the higher national living wage and lower debt interest costs boost the public finances.
A £7bn-a-year net tax increase from the cancellation of plans to cut the rate of corporation tax from 19% to 17% has also helped. As has the government keeping hold of money that would once have been paid to the EU.
But the question of what fiscal rules this government should adhere to has not gone away. The chancellor announced a wide-ranging review of the fiscal framework ahead of this year’s autumn budget. The remit of that review is broad – covering not only the detail of the fiscal rules but also the role of fiscal institutions, such as the OBR, Office for National Statistics and National Infrastructure Commission – and could lead to a more radically different approach to fiscal management than much of what was rumoured over the past few weeks.
It is welcome that the chancellor has chosen to conduct a thorough review of the fiscal framework, rather rushing to adopt a new set of rules. It is also welcome that, in setting out the review’s terms of reference, he has acknowledged the strength of the UK’s existing independent institutions, like the OBR. As the Institute has noted before, the OBR’s work has improved the quality of public debate on the UK’s public finances and helped ensure that difficult fiscal questions are faced by providing a comprehensive picture of the health of the UK’s public finances.
Further reading
The impact of this Brexit-induced reduction in productivity growth on the UK’s public finances is less obvious – but larger – than the money freed up from its no longer having to make contributions to the EU.
For most of the period since the referendum in 2016, it has not been clear what the UK’s future trading relationship with the EU would be, not least because any final trading arrangements are not exclusively within the government’s gift.
The chancellor announced another chunk of money for public services.
4. Spending review
What can the budget tell us about government’s plans for this year’s spending review?
The big (medium-term) story of the budget is a substantial increase in spending, the majority of which is for day-to-day spending. This gives the upcoming comprehensive spending review, expected in the autumn, a very different complexion – especially when compared with the government’s plans as of a year ago.
In March 2019, the plan was for day-to-day departmental spending to increase by £18bn (6%) in real terms between 2019/20 and 2023/24. However, after taking into account commitments made to the NHS and schools, and ongoing commitments on defence and aid spending, this implied that day-to-day spending on all other services would fall – adding to big cuts that had already been sustained since 2010.
The government’s spending round in September changed this picture quite a bit. An additional £12bn was put into public services in 2020/21, meaning that unprotected spending was no longer on course to fall. But it still implied tight settlements for this year’s spending review (which is expected to cover the years 2021/22 to 2023/24), as the chart shows.
But in today’s budget, the chancellor announced another chunk of money for public services. An extra £14bn in real terms has been added to annual day-to-day spending on public services by 2023/24 (after accounting for money needed to replace EU spending that will no longer take place in the UK, which comes to around £4bn a year). This additional leeway means the government could maintain – and even increase – its commitments to the NHS and schools while still providing real-terms increases to other departments. This will be welcome for many public services that are showing signs of strain after a decade of cuts.
The spending envelope – which will be the subject of negotiations between departments and the Treasury over the summer – suggests that this year’s spending review could truly be one that ‘ends austerity’. But turning on the taps is not without its risks, especially as Whitehall will need to get out of a cost-cutting mindset to ensure that they don’t waste the additional spending.
Further reading
The budget was relatively quiet on tax, albeit enacting a net tax rise (as often happens after elections), mainly through the cancellation of a cut to corporation tax trailed in the manifesto.
This was not the green budget many were hoping for from a government preparing to host the COP26 climate talks in November.