Chancellor needs to think strategically as he doles out the cash
25 February 2021: Spring Budget 2021 will inevitably focus on the near-term need to support jobs, exports and investment in building a bridge to economic recovery. However, the Chancellor also needs to outline a vision on how to repair the public balance sheet and how to put the public finances onto a sustainable path.
Martin Wheatcroft FCA, external adviser on public finances to ICAEW, gives his perspective on the Spring Budget next week.
The principal focus of the Spring Budget next week will rightly be on the short-term measures that Chancellor of the Exchequer Rishi Sunak will take to support individuals and businesses as the world emerges from the pandemic over the course of 2021.
Providing essential ‘life support’ for the economy during the first half of the 2021-22 financial year will be high on the agenda. Extensions of business rates relief and tax payment deferrals are reported to be under consideration on the tax side, while continuations to the furlough and self-employed support schemes and to the £20 a week supplement for those on universal credit are being discussed on the spending side.
Money will also be needed for the NHS to deal with a large backlog of elective treatments, for schools and universities to make up for lost education, for public transport where it will take time for passengers to return, and for many local authorities struggling to maintain local services.
That is before the government decides on how it can support the private sector, with concerns that many businesses and jobs will not return when lockdown restrictions are lifted. It will be a challenge to work out how best to support viable business models, put at risk from balance sheets weakened by the pandemic, without getting in the way of the inevitable adjustments needed to adapt to a new normal.
As ICAEW has called for, investment will be needed to foster jobs, exports and digital technology to build a bridge to economic recovery. The climate emergency also needs to be addressed, with substantial investment required to achieve carbon neutrality across the public sector.
However, the Chancellor will be acutely aware that the health of the public finances can’t be ignored forever. The addition of half a trillion pounds of debt to the public balance sheet may be affordable while borrowing costs are so low, but that incremental debt will hang around for a long time.
Higher gearing will only add to the risks facing public finances that were already on an unsustainable path coming into the pandemic. Improving productivity and driving sustainable economic growth are the goals, but their contribution to top-line tax receipts will be at least partially offset by higher interest costs in the future.
This is not the time for significant tax changes, but we do know that the Chancellor has started to think about taxation in the longer-term and he may share some of that thinking next week. Some of this is much-needed reform to the efficiency and effectiveness of the tax system, such as the business rates review currently underway that ICAEW has contributed to, but there is also a need to think strategically about the public finances and how they can be put onto a sustainable path – in all senses.
Ideally, the government would set out a clear long-term fiscal strategy with a vision for tackling the challenges facing the public finances. After all, the fundamental issues are already known. More people are living for longer, driving higher spending on pensions, health and social care. There are proportionately fewer individuals of working age contributing through their tax contributions. Substantial investment is needed to deliver zero carbon. Public services are under significant pressure. Public sector liabilities are approaching £5tn and the government has trillions more in unfunded financial commitments.
The extent to which the Chancellor will set out a longer-term vision is unclear, especially given that there will be a strong temptation to defer potentially controversial changes to the autumn or even to next year when the economic and financial effects of the pandemic are clearer.
On the generational timescales within which governments operate, relatively small changes have the potential to have a large impact in a decade or a quarter of a century’s time, while leaving difficult decisions for too long can make the scale of the challenge even bigger.
The Chancellor will deliver Spring Budget 2021 on 3 March 2021. Keep up to date with the latest by visiting ICAEW’s Budget page or subscribing to the ICAEW Daily email by clicking the ‘Daily’ option in your preference centre.