The Chancellor stood up this lunchtime with two major tasks: to ensure that the UK economy recovers post Covid and to bring public finances back under control.
Despite the record-contraction in GDP in 2020, it was never going to be too difficult to get the economy to bounce back this year as long as vaccination roll-out was successful. With the money supply (M4) up 15.0% in the year to January and fiscal policy at its loosest in generations, with an estimated £250 billion of accumulated savings in the past year and with a frustrated desire to go out and to go on holiday after being locked up for over a year, the economy will be pushed along by some mighty tailwinds later this year. The OBR is coming into line with Cebr in expecting consumer spending in the next year to bounce back and the actual growth could be even more than this as those of us who have been locked up rush out to meet friends, travel, go on holiday or go to bars, clubs and forms of entertainment. The post lockdown spending boom could be the party to end all parties.
And yet. Estimates from the IFS backed up by survey evidence from the ONS suggests that only some people will be partying. The IFS analysis is split by income groups and shows that during lockdown the bottom fifth had to reduce savings while the top fifth have income down nearly as much as their spending. But the middle 60 per cent have cut their spending much more than their incomes and so have been building up savings ready to be spent. The ONS survey-based data shows that the experience is even more mixed, with a third of people even in middle income groups running down their savings over the past year. And clearly many self employed and gig economy workers have had a hard time with jobs and incomes disappearing, especially in retail, travel, entertainment and hospitality.
Even if it feels naff to be spending when many others don’t have the income to do so, it would be wrong for the middle income groups to avoid going out and spending just for that reason. The best thing they can do for the workers in the sectors that have suffered during lockdown is to make use of their services. But with the middle income groups out on a spending spree, it seems both economically sound as well as fair to extend the £20 Universal Credit uprating for a further six months, even if sustaining it risks making it permanent.
So the economy will take care of itself, with the nation out partying. Of course the difficult task is bringing the party to an end before things get out of control…..
The Chancellor looked less assured when he started setting out plans for restoring public finances. The effective rise in income tax by freezing allowances for four years will do a lot of the heavy lifting and this is a good way to raise taxes. My guess is that the markets will be less impressed by the proposed increase in Corporation Tax. Past experience suggests that when this tax rate goes up, receipts are at least as likely to go down as up as we’ve warned about before. The Superdeduction for business investment is an interesting experiment and the OBR’s estimate suggests that this will boost business investment by 10%. Cebr has called in the past for Free Ports and we expect this will also boost the economy, though not immediately.
Where the Chancellor could have been more imaginative is in his infrastructure plans. I first started working on Crossrail more than thirty years ago and it is still not yet in operation. So the Chancellor needs to be planning now for the infrastructure of 2040 and 2050. He needs to be planning for autonomous electric vehicles, road pricing, urban metro and driverless public transport, and even air taxis. He needs to end the communications divide between those with working wifi and those without. He needs to ensure that the urban built environment adapts quickly to the changed demand for retail and office space. The opportunity to repopulate cities can be boosted through autonomous and green urban transport, which will eradicate many of the deterrents to city living. The new UK Infrastructure Bank and the plans for Green Savings Bonds could help here.
But we should not forget that this Chancellor has done a pretty decent job keeping the economy moving forward in difficult times, caused not only by Covid but also by Brexit. The fastest rate of GDP growth recorded in recent history was 6.5% in 1973. Growth this year might even beat that – the current Cebr forecast is 6.8%. The OBR expects the record rate of growth in 2022 with growth that year of 7.3%. The challenges will emerge in the coming years as the monetary growth and the fiscal expansion risk higher inflation. And over the next year the Chancellor’s priority will shift to keeping the supply side of the economy growing while restraining demand. If the party is going really strongly this Autumn he may have to take action sooner than he expects!
For more information, please contact:Douglas McWilliams email@example.com phone: 07710 083652
1 https://ifs.org.uk/uploads/BN308-Spending-and-saving-during-the-COVID-19-crisis-evidence-from-bank-account-data_2.pdf 2 https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/bulletins/personalandeconomicwellbeingintheuk/january2021