Mr Sunak presides over an economy in radical transition and subject to extreme turbulence. His achievement on Wednesday was to persuade his sympathisers that post-Brexit Britain has a bright future – if only we hold fast, writes Victor Hill.
The Chancellor rises…
When Mr Sunak rose to the despatch box in the House of Commons at just after half past twelve on Wednesday 27 October, much that he was about to present had already been pre-figured in the previous Sunday’s newspapers.
A series of presumably calculated leaks attracted the ire of the Speaker of the House, Sir Lindsay Hoyle on Tuesday; and just before he stood up, Mr Sunak was given a proper dressing down by the Deputy Speaker, Dame Eleanor Laing, for preempting Parliament. Mr Sunak subsequently began his deliberations with a humble apology.
In fact, the headline proposals of a spring budget/autumn spending review (increasingly they are the same thing since both contain taxation and spending initiatives) are usually less important than the body of numbers tallied in the attendant documents, which attest to the fitness or otherwise of the national economy. The substantive message of these, released when the Chancellor sat down, was that the UK economy was in a sounder condition than anyone might have hoped six months ago.
No amount of pre-leaked policies can typify the underlying message which emanates from a chancellor’s performance on the floor of the House. Mr Sunak’s delivery was energetic, precise, confident and optimistic. “Aspirational” is a word much used about his tone. A bantamweight boxer, he lands a very strong punch; or, if you prefer, like a judo black belt, he uses the weight of his opponents against them. Of course, his Budget was political: all Budgets are.
It is remarkable that Mr Sunak has only been Chancellor since February last year, having been appointed just before the pandemic struck. One thinks of him as having been around much longer. It is still too early to categorise what type of chancellor he is – a fixer who toils to keep the rickety show on the road (Denis Healey); an architect who aims to change the shape of the British economy for good (Nigel Lawson); or a ruthless political strategist who aims to drive government policy from the Treasury (Gordon Brown). For now, he is still a youngish man who has weathered a terrifying economic storm, and who seems to be only just hitting his stride.
Substantive measures
The most substantive feature of this Budget was an across-the-board increase in state expenditure which will rise by £150bn by 2024-25, relative to 2019 levels. Every Whitehall department will receive real-terms increases in funding, with the exception of the Ministry of Defence and the Department of Digital, Culture, Media and Sport. The public-sector pay freeze is to thaw. Schools (in England) will receive an extra £4.7bn – but that will only restore spending per pupil to where it was in 2010. The ’taper’ on Universal Credit (UC) is to be reduced from 63 percent to 55 percent such that two million UC recipients who are in work will be better off by about £1,000 per year. That will offset the discontinuation earlier this month of the temporary uplift in UC of £20 a week during the pandemic – at least for those in work. The foreign-aid budget is to be restored to 0.7 percent of GDP by 2024. The devolved nations will receive proportionately increased block grants.
The National Health Service now consumes more than 40 percent of total government expenditure. An ageing population with more exacting expectations about what it can and should provide means that demands on the NHS continue to climb. The first hip replacement was undertaken by the NHS in 1962 and for years this procedure was a rarity. Now it is commonplace.
My concern is that more funding is being pumped into the NHS without any tangible reform being undertaken. Health Secretary Sajid Javid has sketched out some proposals for further digitisation of NHS services – long overdue – but these are nowhere near ambitious enough. They will not bring about the interactive, self-empowering health care required – where, for example, all our health metrics could be monitored remotely in real time, 24/7.
There is a sense of resignation amongst Conservatives that a government that effectively paid people to stay at home for year or more would have to raise taxes sooner rather than later to stave off a precipitous decline in state finances. What is less clear is whether the move towards higher spending and higher taxes signals a fundamental ideological shift in Tory thinking. By 2025-26, according to the OBR, state expenditure will reach over 41 percent of GDP − equivalent to that under Clement Atlee in the late 1940s. And the tax burden will be akin to that under the government of James Callaghan in the late 1970s, at around 40 percent of GDP. That is not what nearly 14 million Tory voters endorsed in December 2019.
For many Tory commentators this was a Labour Budget delivered by a Tory Chancellor. According to the Daily Telegraph’s Alister Heath, “the Tories’ nightmare conversion to Brownism will end in catastrophe”. But what such pro-market commentators do not confront is that there has been a perceptible change of mood over the last two years, no doubt partially accelerated by the pandemic. I am struck that even middle-class homeowners are talking about the necessity to nationalise all transport and utilities – reverse Thatcherism, if you will. That is what Jeremy Corbyn promised. One line of argument is that it is now payback time for the painful Cameron-Osborne austerity regime of 2010-16.
The real tax bombshells were exploded firstly last March, in the form of the forthcoming hike in corporation tax and then in early September (the 1.25 percent rise in national-insurance contributions, plus increases in taxes on dividends) to pay for the NHS and social care. The latter measures will prospectively raise tax revenues by over £31bn, whereas the measures announced on Wednesday will bring in a further £16-17bn. And most of these tax hikes took the form of frozen thresholds and tax bands.
The decision to end George Osborne’s state pension “triple lock” will save the Treasury £30.5bn over the next five years. The link between the pension uplift and increases in earnings will now be severed. Britain’s 12 million state pensioners will not be celebrating. And the £325,000 inheritance tax (IHT) threshold, which has remained unchanged since 2009, will be frozen until at least 2026. With the continued rise in house prices, many more middle-income people are going be caught in the IHT net.
New fiscal guidelines will determine that “in normal circumstances” the government will only borrow “to invest in our future growth and prosperity”. Is this the return of Mr Brown’s famous muse, prudence? Governments cannot be expected to resolve every problem, Mr Sunak intoned. He concluded with a ‘get-out-of-jail’ card: he aspires to low taxes as and when we can afford them.
As Saint Augustine famously prayed: “Lord, make me chaste – but not yet”.
Cheers!
The overhaul of the tax regime around alcohol is timely and is made possible by Brexit. HMRC will reduce the number of excise bands from 15 to just six. These will correspond to the alcohol by volume (ABV) of the drink in question – so strong spirits fare the worst. Still and sparkling wines will henceforth be treated equally. The “irrational” duty on sparkling wines of 28 percent will be axed.
I have long argued here that the nascent English (and Welsh) wine industry should be given preferential tax treatment. This industry hardly existed at all 25 years ago but is now a significant contributor to both our agricultural economy and the nation’s enjoyment. It has become an eminently investible new sector. Mr Sunak’s new regime will benefit English wine producers to the extent that most English wines have a lower alcoholic content than equivalent imports, and many of the most prestigious English wines are sparkling. Whisky and gin producers will be consoled by the scrapping of the planned increases in duty.
The cut in excise on draught beer – so-called “draught relief” − is a canny concession to the pub trade which has had a torrid 18 months. Shares in Wetherspoons, Marston’s and Mitchells & Butlers all rose by over five percent in response. This will cut the average price of a pint in your local by three pence – not that that is likely to be passed on. For weaker beers below 3.5 percent ABV, the reduction in duty could be as much as 25 pence per pint.
Underlying finances
The UK economy is due to grow by around 6.5 percent this year – an incredible figure, superior to that of our competitors, until one reflects that it slumped by nearly 11 percent last year. The UK economy will reach its pre-pandemic peak by around the end of this year.
The deficit this year will reach £183bn. That’s eyewatering, but colossally smaller than last year’s £319.9bn. In 2022-23 it will be £83bn. The gross national debt will end the year at £2.37tn − £135bn less than expected. That will yield a debt-to-GDP ratio of 98.2 percent – well below the pessimistic forecast of 110 percent. Excluding debt held by the Bank of England, the ratio will peak at 85.7 percent of GDP in 2023-24.
The “economic scarring” anticipated from sequential lockdowns will not be as severe as feared. In fact, it will be far less than that sustained in the financial crisis of 2008-09. As a result, new borrowing has consistently undershot the OBR’s forecasts. As traders have snapped up a dwindling supply of new debt, so gilt yields have trended down. The UK Debt Management Office has cut planned gilt sales for the fiscal year ending 5 April 2022 to just under £195bn – about £25bn less than analysts had forecast. The number of new gilt auctions between now and next April will be reduced from 33 to 14. This comes as the Bank of England prepares to wind down its £875bn pandemic bond-buying scheme.
Looking on the bright side, we are heading towards near full employment next year with rapidly rising wages. Tax receipts are surprisingly buoyant – VAT receipts especially so − and will exceed the £1tn mark for the first time in 2023-24.
Growth
For Brexiteers, liberation from the EU was going to be an opportunity to unfetter the UK from unnecessary regulation and institutional inertia. That would drive growth, medium term. There was little in Mr Sunak’s Budget to suggest that Britain will be able to outperform its European neighbours in growth terms in the coming years. No amount of R&D spending can guarantee greater productivity; and not all capital expenditure is a good thing – some is downright wasteful. (The jury is still out on HS2 – but let’s not go there now).
The UK is to become a “scientific powerhouse”. It already is. But for growth to be unleashed we shall have to embrace the new – vertical farms, lab-grown meat, AI-assisted healthcare, flying taxis, the hydrogen-powered economy and the rest.
The OBR reckons that real wages in 2026 will be lower than in 2008. That reflects as much the record of weak growth in the decade after the financial crisis as the impact of the pandemic and Brexit. Continued labour shortages – both skilled and unskilled – will be a dampener on growth until such time as robotisation and upskilling programmes bear fruit.
Climate change
For once, the looming “climate catastrophe” did not figure at all. Just days before COP26 convenes in Glasgow, the Chancellor froze fuel duties and cut air-passenger duty on domestic flights to stimulate Britain’s airport sector rather than our airlines. However, a new “ultra-long-haul distance band” of £91 will apply to flights of over 5,500 miles from the UK.
Environmentalists point out that a journey from central London to central Glasgow takes about the same amount of time either by plane or by train, given transit times to and from and within airports. Yet the train journey is invariably much more expensive already, even though much less CO2 is generated. To increase the differential even further does not make climate sense. In France, President Macron has banned flights between airports where an equivalent train journey could be completed within two-and-a-half hours or less.
There was no mention at all of road pricing, which, as I have suggested here repeatedly, is inevitable over the medium to long term.
The goblet of fire
The goblet in question is, of course, inflation. Inflation is expected to hit 4.4 percent next year – possibly 5.5 percent – though to fall to 2.6 percent in 2023. About £500bn of the government’s £2.2bn outstanding debt is in the form of index-linked papers, the cost of which rises in accordance with inflation. This means that even if interest rates rise modestly – the base rate is expected to reach 0.75 percent next year – the cost of servicing the national debt will rise appreciably. It could be £24bn more, according to the OBR – almost enough to absorb the new revenues from the hike in NICs.
This government should brace itself for the inevitable cost of living squeeze that will intensify this winter. Food, domestic heating and energy costs, as well as personal taxes are heading upwards. Inflation is eroding whatever wage rises are coming through – including those arising from the increase in the Living Wage to £9.50 per hour. A rise in interest rates – possibly as early as next week – will, very swiftly, push up mortgage payments. Council tax will surge by £6.6bn next April, partly driven by increased social-care budgets. A cold winter could accentuate the pain. Add to this picture perturbations in supply chains – perhaps exacerbated by our French neighbours – and we get a recipe for extreme disaffection.
The key question is whether the post-Covid bout of inflation is “transitory” as most central bankers seem to believe, or whether it will become “embedded”. The next year will be a testing one for this government, but the “boosterish” PM and his Chancellor seem up for it.
Market reaction
The markets were neither impressed nor spooked by this Budget. The FTSE-100 edged 0.33 percent lower while the FTSE-250 was very marginally up. The pound lost just over half a cent against both the dollar and the euro. But the money men and women cannot help but reflect that the resilience of the UK economy is a wondrous thing.
The proof of the pudding will be in the eating. This Budget was an exercise in heroic extemporisation. Mood is all. There are sound reasons to believe that post-Brexit, post-Covid Britain will thrive, even if the downside risks are dizzying. The markets will bide their time and will remain cautious for now.
The sunlit uplands are obscured by cloud, but the caravan trundles on.
Listed companies cited in this article which merit further investigation:
- JD Wetherspoons PLC (LON:JDW)
- Marston’s PLC (LON:MARS)
- Mitchells & Butlers PLC (LON:MAB)