Budget 2021: Four key issues for Rishi Sunak today
Just a few months ago, Chancellor Rishi Sunak had hoped that his spring budget would be an opportunity to move the economic agenda away from Covid-19, and back towards the government’s ‘levelling up’ commitment.
But as he prepares to announce his latest set of measures on later today, the reality looks very different.
Despite the good news – that all priority groups will have received their first dose by Easter and the impact the third national lockdown is having on new cases – it is becoming increasingly clear that it could be some time before Covid-19 restrictions are removed entirely.
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The main takeaway for this Budget may be that Covid-19 is set to linger for quite some time, said City-based James Smith, developed markets economist at ING Think, part of the Dutch banking group ING.
“It will probably take until late June or July at the earliest for all adults to receive their first dose, assuming supply capacity can increase to accommodate both first and second doses,” he told City PM this morning.
In the meantime, community transmission is likely to rise again among the younger population, so given that Covid-19 will be around for a bit longer, Smith zooms in on four issues that play a key role in today’s Budget.
Supporting struggling cashflows
Aiding firms’ cashflow is going to be key for the jobs market, as recent ONS data showed that a third of all hospitality firms say they have little or no confidence they can survive the next three months.
The furlough scheme can only protect jobs as long as firms are strong enough to support them in the recovery phase. “And again, the picture is unsurprisingly very sector-specific,” Smith said.
In the hospitality sector and among other consumer services, the alarm bells are starting to ring.
“While it’s hard to know how these [ONS] figures compare to pre-pandemic norms, the fact that a third of hospitality firms say they have little or no confidence they can survive the next three months is striking,” he added.
Unlocking pent-up demand
One piece of better news for Sunak is that there’s a good amount of consumer firepower available once the economy does reopen.
“Involuntary savings have risen substantially, and the challenge is to make sure some of this is spent,” Smith said.
One option would be to look at policies like ‘Eat Out to Help Out’ again, which subsidised meals out in August 2020.
“The benefit of this sort of thing over levers such as VAT cuts is that it directs consumer savings directly to where the money is most needed,” Smith noted, although he did stress “it’s not clear if this is compatible with the wider Covid-19 containment strategy.”
Consumer confidence is going to be key this summer, Smith continued, and he thinks the government is likely to remain wary of introducing policies that risk pushing up the number of cases and therefore prompting more cautious behaviour.
“Instead, the bigger issue is that the rise in involuntary savings has been unequally distributed across income groups,” he said.
According to a recent Bank of England survey, lower earners have typically seen savings fall and this is tied to higher rates of furlough and redundancies.
Extending furlough
Smith called this “undoubtedly the most pressing issue,” and said extending the furlough scheme until September, as the government announced yesterday, had been inevitable.
Last night, the chancellor said that it was “only right” that the government continued to help businesses and pay workers’ wages as the UK looks to lift all Covid restrictions permanently over the next four months.
But beyond an extension until September, the challenge when tapering the support will be to limit job losses to roles that are definitely no longer viable after the summer due to the economic damage done.
Borrowing
Finally, Smith touched on the deficit in the next fiscal year, as it “will remain in the high single digits,” down from around 14 per cent for 2020-2021.
“Unemployment is also likely to rise this year, while pandemic-related expenses such as test-and-trace will also continue to be felt through most if not all of next year.”
However, this should not come as much of a concern. Government borrowing costs are at record lows, and that means the pressure to look at balancing the books is pretty minimal, to say the least, Smith explained.
“Nevertheless, I suspect there is likely to be a renewed discussion about this later in the year, and we may therefore see some renewed focus on tax rises this time next year, to help finance higher spending on the government’s non-Covid election priorities,” he concluded.