Not since World War II has a crisis of these proportions presented itself to the world. With the complete affects and implications of the Coronavirus still unknown it seems that the government unofficial policy may be "Keep calm and drink through it". There were several pub friendly announcements including all alcohol duty frozen and further help for with business rate discounted or abolished for 2020-2021 depending on their rateable value. The new Chancellor might have misunderstood the NHS guidelines that "alcohol kills the virus."
The Chancellor has announced not only a very significant £30 billion fiscal loosening but also indicated that he will be keeping the situation under review. In reality, £12 billion of the £30 billion package is "temporary, timely and targeted measures to support public services, individuals and businesses through the economic disruption caused by Coronavirus."( Source: Budget Fact sheet pdf) The remaining £18 billion is made up of general spending measures to boost the economy already in the pipeline.
It is expected there will be a second budget this Autumn after a spending review in the summer.
The Office for Budget Responsibility (OBR) says this budget is the largest sustained fiscal boost for 30 years. By the end of this parliament, day to day spending on public services per year will be £100bn higher than it is now in 2020. There will be an extra £175bn invested over next 5 years, which according to the OBR will add 0.5% to GDP growth.
The government are now embracing the benefits of borrowing to invest with long term low interest rates. Effectively, taking a leaf out of the oppositions play/wish book of anti-austerity. This is a major change; this budget was more like a pre austerity Gordon Brown budget. This is infact the biggest relaxing of the purse strings since the 1992 pre-election budget.
The growth forecasts are mixed. The UK economy was expected to grow rather slowly over the next five years, even before Coronavirus.
2020: Growth of 1.1%, down from 1.4% forecast in the 2019 Spring Statement
2021: Growth of 1.8%, up from 1.6%
2022: Growth of 1.5%, down from 1.6%
2023: Growth of 1.3%, down from 1.6%
2024 Growth of 1.4% - new forecast
But given the fiscal stimulus announced, the Office for Budget Responsibility will want to rework these numbers, let alone when they consider the economic effects of the virus.
There will be significant increase in public borrowing and some increase in taxes revenue.
- Public sector net debt is forecast to hit £ 2 trillion pounds in 2024-25 (£2,031m, from £1,799 March 2020) (Source OBR)
- The government will be taking in more tax, as well as spending more and borrowing more. The net tax rise announced in the budget reduces borrowing by an average of £5.5bn a year, (OBR). This is mainly due to cancelling next month's cut in corporation tax, from 19% to 17%. That will bring in £6.4bn per year on average.
The government has confirmed it has increased the National Insurance (NI) threshold from £8,632 to £9,500 from April. It was also announced that those earning under £9,500 would pay no national insurance (NI) whatsoever, saving 31 million people across the UK up to £104 a year. More importantly was the confirmation that those being taken out of paying NI will not lose out on credits towards their state pension.
Anyone earning above the lower earnings limit, which will increase with inflation from its current level of £6,136 will still be entitled to a year's credit. This is important because people need at least 10 years' credits to receive any state pension and 35 years to receive the full state pension which is expected to rise to £175.20 a week from April. Without this provision, people might have gained from paying less NI today only to suffer from a reduced state pension in the future.
In addition, the OBR's forecasts show that there is some evidence that the money saved by leaving the European Union is being recycled into substitute UK spending.
That includes support for the farming support, industrial strategy and science programmes. Currently, these are worth £4.3bn this financial year because Britain's EU divorce payments are front-loaded. By 2024-25 it is worth £14.6bn (£11.3bn in lieu of EU transfers, and £3.3bn of estimated customs duties).
In its Economic and Fiscal Outlook report (pdf), the Office for Budget Responsibility says Brexit has led to the economy being 2% smaller than it would have been. This is partly reflected by lower net inward migration, but mostly it reflects weaker productivity growth on the back of depressed business investment and the diversion of resources from production towards preparing for potential Brexit outcomes.
The OBR believe that around 1/3 of the long run hit to productivity from Brexit has already happened, that 1/3 is likely to come over the forecast period (2024-2025) and the rest comes through post the forecast period.
Rob Weaver is an author for accountingcpd. To see his courses, click here.