Our best guess is that growth this year will be zero plus or minus a lot. If that is right, our back of the envelope calculations say the Budget means a deficit of £90 billion, which seems about right. But if things turn out to be significantly worse, a temporary VAT cut will be necessary.
The new Chancellor Rishi Sunak has had an interesting start. Not only did his predecessor resign less than a month before the Budget was due but also the economy and country has been rocked by Coronavirus. A fairly acrimonious negotiation over Brexit has been pushed out of the news. The background has been a debate seemingly between Treasury officials and the Prime Minister’s office about the extent to which current circumstances justify deviation from the fiscal rules.
The outlook is probably even more uncertain now than it was in 2008 at the heart of the financial crisis. The Chancellor is talking about a ‘temporary disruption to the economy’ with ‘up to a fifth of the workforce’ unable to attend their workplaces at any one time. He has pointed out ‘we can’t avoid a fall in demand’. He has made money available for small businesses and for people who are unable to work as well as for the NHS. In total there is £7 billion for businesses, people and self-employed and £5 billion for NHS simply to take account of Coronavirus.
In addition, he is planning a further fiscal loosening of £18 billion, mainly for infrastructure, environment and support for business. Most duties on alcohol and fuel have also been frozen.
The growth forecast is (excluding Coronavirus effects) for 1.1% this year and 1.8% next year. Our best guess is that growth will be around zero this year with a reasonable recovery of perhaps 2.5% next year. If these numbers are right, the budget and associated other policy measures are probably about right, though my back of the envelope maths suggests borrowing could hit £90 billion this year. It should fall back to around £80 billion next year.
But even Cebr can’t predict precisely what will happen. The measures to support retail and leisure should help keep businesses alive. But nothing has been done to encourage people to keep spending and indeed it will be very hard for those confined to their homes to purchase except online.
The best thing for the Chancellor to do is to keep looking at the situation and to adjust policy in the light of events. If we effectively have a consumer strike, a temporary VAT cut is the best measure to help bring spending forward.
So far the Chancellor has done well to create confidence that he is sensitive to the scale of the problems he faces. But we are at an early stage in going though a serious battle, economic and otherwise. It is unlikely we have heard the last major fiscal event this year.