The perma-budget chancellor will not be going after your money (just) yet

It’s a long time ago and a lot has happened since then but can you remember how much money Rishi Sunak set aside to spend on COVID-19 in last year’s budget?

I’ll give you a clue: the amount this country has now spent on coronavirus is close to £280bn and still rising.

OK… as clues goes that’s a bit unhelpful, because the actual amount the chancellor pledged to fight COVID-19 last March was £12bn.

That’s right: a mere 5% or so of the eventual fiscal toll over the past year came from Budget 2020.

To some extent this is a sign of how quickly events were unfolding last March. Within a few weeks of his first budget the chancellor had to return to the television cameras to announce a suite of measures which absolutely dwarfed the stuff in the budget – most notably the furlough scheme.

But it underlines the extent to which times have changed. Once upon a time the budget was the most important fiscal event of the year. Everyone would wait eagerly for the chancellor’s speech, where he’d surprise us all with a range of policies that would have a lasting influence on our lives in the coming years.

But this year’s budget is simply the latest in a sequence of fiscal events (14 or 15 depending on how you count them) that began last March.

This is the era of perma-budgets, where at any given moment the chancellor could descend with yet another life-changing policy. The relative unimportance of budget day itself has only been reinforced by the extraordinary number of budget policies which have been fed to the press in advance.

Once upon a time, chancellors would resign if any part of their budget was leaked to the press (at least, that’s what Hugh Dalton famously did in 1947).

Under Tony Blair – or should we say Alistair Campbell – and then the coalition, the leaking and pre-briefing increased except that, back then, most of this pre-briefing was delivered in a hush-hush manner.

In the past week I (and I presume most journalists) have received a staggering number of unashamed official pre-announcements from the Treasury about stuff in this week’s budget.

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You can see why they’re doing it. On the day there’s a risk that some of the smaller measures can get dwarfed by the big stuff. And it would be oddly archaic, in an era of fast-moving finance, if a government only adjusted policy once or maybe twice a year. Even so: it rather spoils the notion that there is something sacrosanct and important about budget day itself.

That being said, what should one look out for this time around? To some extent the most interesting stuff will be within the economic forecasts.

How fast does the Office for Budget Responsibility (OBR) expect the economy to grow this year? When do we get back to our pre-COVID levels of national income? The answers to those two questions will help inform another one: how much fiscal repair work must be done, in the form of higher taxes or lower spending? For typically, the bigger the hole in economic growth, the bigger is the hole in the public finances; the stronger the growth, the more revenue will come into the Exchequer from taxes, making that repair job less demanding.

Last March, the OBR’s official growth forecasts expected the economy to grow by 1.1% in 2020 and 1.8% this year.

Those forecasts were out of date at the time they were announced though, and by November the OBR’s expectations for the change in GDP (at least those in its central scenario) were -11.3% in 2020, followed by growth of 5.5% and 6.6% in 2021 and 2022 respectively.

They expected the UK would return to its pre-crisis levels of growth by the end of 2022, though there would be permanent scarring – in other words the economy didn’t look like it would ever get back to the growth trajectory it was on before COVID hit.

We already know that the annual drop in 2020 was a bit lower than that: 9.9% according to the latest Office for National Statistics numbers.

We also know that those numbers might be subject to further upwards revision. So the economic picture already looks better than it did in November. But that’s oversimplifying it because there’s a couple of things going on beneath the surface: on the one hand we are in another lockdown (that wasn’t foreseen by the OBR in November). But on the other hand the arrival of vaccines promises to supercharge growth this year and next, especially if it prevents any future lockdowns.

In other words, it’s quite likely the OBR will move forward its estimate of when we get back to the pre-crisis level of growth. Just as it did last time around, it is likely to offer a few different scenarios – a sign of the deep uncertainty around forecasting anything these days.

Stronger growth might make Rishi Sunak’s job slightly easier, in that it means he will have to do less to bring the deficit down. But there’s no getting away from the size of the deficit, likely to be £300bn or more higher than was pencilled in last year.

Some of that borrowing – around £80bn – is due to the fact that the economy is weaker, so tax revenues haven’t been flowing in and benefits spending has increased. But the bulk is down to the extraordinary sums the government spent to keep the economy anaesthetised through lockdown.

I say extraordinary (and they are unprecedented outside of a war), but it’s worth pondering for a moment whether these sums were more than we’ve seen from other countries – if only because the chancellor seems to be implying that. In his interviews given ahead of this budget (again, a first: chancellors usually keep a low profile in the run-up to the event) he has said: “we went big and we went early”.

This is not quite right. The UK was not the first country to introduce a furlough scheme; Denmark announced theirs the weekend before the chancellor. Actually for those of us watching what was happening around Europe at the time, the UK looked, at least for a week or so, to be something of a laggard.

Nor was Britain’s COVID-19 fiscal response the biggest in the developed world.

At 17% of GDP it was higher than Germany or France but lower than Canada, Japan and the US, on the basis of the president’s latest plans.

Perhaps a better way of putting it would be not “we went big and we went early” but: “we went pretty big and we went at broadly the same time as the rest of Europe”. But I can see that’s not quite as catchy.

However you describe it, Mr Sunak is likely to say in his speech that money will have to be repaid, which brings us to the question of taxes.

While most economists strongly believe now is not the time to raise taxes, the chancellor (and many in the Conservative party) seem convinced that not doing so would be a terrible mistake. Among those leaks to papers has been one suggesting that corporation tax will be lifted in the coming years.

The real question from this budget, though, is whether the chancellor’s bark is worse than his bite.

Does he talk big on tax rises without actually implementing many of them? That would be my hunch, though it’s no more than that.

And we won’t really have a sense of the actual scale and impact of any tax rises until we have a look at the tables and numbers released shortly after he sits down – so stay tuned for that.

Why do I think it’s unlikely he embarks on austerity or swingeing tax rises right now? In part because the economy is still contracting and needs time to recover from the pandemic and lockdown. But in part because the economic rationale for balancing the books is weak – for the time being at least. With interest rates as low as they are right now, the cost of servicing Britain’s debt is at the lowest level (as a percentage of tax revenues) since comparable records began in 1700.

Indeed, some economists look at that datapoint and exclaim: why on earth isn’t the government borrowing and spending even more? Isn’t this the opportunity of a lifetime? Well, perhaps. But then again, fiscal largesse does not always result in stronger economic growth.

Right now Joe Biden is putting together a $1.9trn fiscal package but many economists believe that it is so outsized that it will simply trigger a rise in inflation rather than sustainable growth.

As the pandemic ends, this is a debate the chancellor will be unable to skirt. And whereas many of the decisions he’s taken so far have largely revolved around dispensing money to people, debating how to extract money from people is far, far trickier.

So while the budget coverage is likely to be dominated by the obvious measures – the likely extension of the furlough scheme, stamp duty holiday and Universal Credit increase – the way Mr Sunak handles this impending dilemma will be more telling.

That said, don’t expect all of these questions to be resolved in the budget. As I say, since we’re living in the age of the perma-budget it’s equally plausible we have another debate about it next month, or the month after, or the month after that.

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