What does Rishi Sunak’s Budget tell us about Britain?
Last week kicked off the first in a series of events Audley Intelligence is hosting in partnership with Forum. In this inaugural gathering Audley’s Managing Partner, Chris Wilkins, was joined (virtually) by former Chief Secretary to the Treasury, Rt Hon David Gauke, to discuss Rishi Sunak’s recently announced Budget.
David was a senior member of the government under UK prime ministers David Cameron and Theresa May. He served on the House of Commons Treasury Select Committee before spending seven years in the Treasury itself as Exchequer Secretary, Financial Secretary and finally Chief Secretary to the Treasury under Chancellors George Osborne and Philip Hammond.
During his time in the Treasury, David worked on nine Budgets and seven Autumn Statements, making him uniquely well placed to discuss what Rishi Sunak’s Budget reveals about the state of the UK economy, the nation’s prospects for the year ahead, and Britain’s place in the world.
Overall, we took away five main points.
Although spending will still be tight, Rishi Sunak’s Budget is still a step away from Osbornomics and historic austerity.
A close look at the numbers and analysis from the likes of the Institute for Fiscal Studies (IFS) show that public spending will remain tight. However, while George Osborne’s fiscal consolidation was based largely around reducing public spending, Rishi Sunak set out a number of future tax rises. Ultimately, public spending has been squeezed about as much as it can and the government will have to spend more to deliver on their current plans. General cost increases involved in things like building resiliency in the NHS are unavoidable. On top of this, Rishi Sunak may have to apply a second round of tax rises in conjunction with loosened spending, hoping the economy bounces back better than expected. The Office for Budget Responsibility (OBR) is being cautious here but say economic growth post-COVID may well surpass expectations.
The Corporation Tax increase conflicts with the ‘Global Britain’ narrative.
The government left the three big taxes (National Insurance, Income Tax and VAT) alone, taking the view that it is better to have a few big increases rather than several small ones. Although that might be the right decision politically – particularly given the existing manifesto commitments – it seems ill-advised for the long-term, given the UK’s obvious need to be competitive on Corporation Tax. Having said that, when the tax was cut under George Osborne we didn’t see a boom in investment and in a period of widespread uncertainty the benefit of keeping it low may be limited. Regardless, it certainly calls into question the government’s ‘on the side of business’ and ‘global Britain’ messaging.
Freeports and super-deduction tell us more about political strategy than the future.
Whilst the super-deduction policy should increase investment, any long-term behavioural impact seems unlikely given its two-year timeline. Likewise, it’s doubtful that eight new freeports will genuinely increase the aggregate size of the economy; the evidence suggests the policy displaces activity rather than creating it. What’s more interesting is what these policies tell us about the government’s political strategy. The inclusion of freeports in the budget coincides with the abolition of the Industrial Strategy Council potentially demonstrating a move away from external management of government strategies and towards a more direct interventionist approach. The government is keen to be seen to take those decisions directly and reap the political reward but it could end up in a quagmire of allegations of pork-barrel politics. What is clear is that the policies align with one of the Conservative’s top priorities: winning Northern votes in the long-term.
When it comes to green issues, the government will want to use carrots over sticks.
According to previous statements, the Chancellor has a genuine interest in the green agenda. Indeed, most politicians recognise the importance of tackling climate change, beyond the magnitude of the issue itself, in order to remain attractive to young voters. How this government will approach the challenge, however, is yet to be seen. For instance, how will they qualify raising fuel duty to new Conservative voters who have spent the winter working from home with the heating on and are waiting to be charged? We may know more on this soon if Rishi Sunak includes an outline for green taxation during ‘Tax Day’ on March 23rd, but the government will be instinctively cautious and whether they have the money for generous carrots is still up for debate.
The best thing the government can do for struggling businesses is to improve relations with the EU.
Following Brexit, there is a very real limit to what the government can do to compensate businesses in need. The most effective way of easing the burden is to focus on re-building trust with Europe. If we can be more flexible in certain areas of negotiations, they may be flexible in return. But if the Northern Ireland Protocol is anything to go on, progress will be slow, and we may even see things get worse before they get better.
Written by Lucy Thompson, Account Manager at Audley