The Budget – Will it survive the virus?

An insight on the 2020 Budget from Chris Roberts, former Leader of Royal Borough of Greenwich.

An insight on the 2020 Budget from Chris Roberts, former Leader of Royal Borough of Greenwich.
When the former Conservative Prime Minister, Harold MacMillan, was asked what caused him the most trouble during his premiership, he replied, “Events, dear boy, events.”

This seems to the perfect caveat to any consideration of Rishi Sunak’s first budget as Chancellor of the Exchequer (CoE). Another maxim which holds true for this budget, as for every one presented by his predecessors, is that budgets are never quite what they seem. Call me an old political cynic but I expect the cost of my favourite tipple to go up. I also thought Keynes’ statement that death and taxes are the only certainties in life, might have had ‘excise duty on alcoholic drinks’, added to it.

When I hear a Chancellor eliminating planned rises in tax on drink, I think he (and scandalously, it has never been a she) is trying to get me drunk and hide something. Chancellors say what they want journalists to report the next day. They always succeed because the small print is buried and not subjected to proper analysis for several hours and almost certainly not until the morning deadlines have passed.
So, what do we make of this budget?

Sunak presented two versions of himself. A fairly statesmanlike opening on the Coronavirus and then a rather affected and contrived attempt at rabble rousing in the second half. This did not suit him. In a Cabinet whose other senior members are an attention grabbing (and seeking) Prime Minister, alongside Priti Patel and Dominic Raab, both of whom look grossly over-promoted, the statesmanlike version of Sunak seems a considerable asset to an otherwise flimsy top-tier.

Moreover, in terms of personality and presentation, he seemed, in serious guise, a perfect foil for the PM. He should very much stick to it. Read the papers and listen to Sunak and you’ll read of a major expenditure boom about to hit us. Certainly, it promises the greatest loosening of fiscal policy since 1992. In 1992, of course, all that was reversed within six months, as the UK crashed out of the ERM.
“Events, dear boy, events.”

Revenue Expenditure

Sunak promised that Departmental Expenditure Levels (DELs) would rise by 2.8%. Here, he has taken into account money the UK will save in EU budget contributions but what he didn’t want us to know, is that he has not deducted the contributions from the EU, to the UK.
When this is factored in, the DELs rise only by a net 2.1%.

Moreover, this spending is loaded into the NHS, schools, defence and overseas aid. If you’re concerned about the closure of your local library, or further cuts to the regularity of your bin collections, then you may see no relief from this budget. Local Councils will again face little respite in the spiralling costs of social care of the elderly, who did not merit one mention in the budget. Indeed, the elderly might feel the budget was less about ‘getting it done” than them “being done for”. The exclusion of social care was a staggering omission, given the level of crisis which affects the care sector all over the UK. Of equal surprise was the lack of attention and help for the police. There was nothing to suggest the reversal of the 22,000 police officers cut since the beginning of austerity in 2010. What indeed has happened to the former party of law and order?

With Sunak’s plans running to 2024-25 (the likely general election year), real spending on public services will still not have returned to the levels inherited by the Conservatives in 2010. Many service areas will be continuing to experience the deep austerity level of provision, due to skewed pattern of priorities the Government has chosen where it is spending on service provision.

Captial Expenditure

The big headlines focused on capital expenditure, with a projected investment in infrastructure almost double the previous norms. There is a projected 5.2% average increase in capital spending to 2024-25. Of this, 13.1% is loaded into the first year, tailoring down to 1.4% in the last year of this period. This looks a highly unrealistic profiling. The simple fact is that government departments are poor at spending to budget on capital schemes. It will be very difficult to spend in excess of £1bn per month in the first year – or at least, to spend it wisely and to best effect.

Historically, government departments fail to spend capital budgets. This is not, of itself, always bad. Spending well, as opposed to quickly, is much to be preferred. Based upon historic underspending of capital budgets, a measured analysis of the government’s spend profile, suggests capital investment levels of 3.3% a year are more realistic, than the stated 5.2%. This would still be impressive and provided the borrowing capacity remains in situ, offers the prospect of potentially a better quality of spend, spread into a second Johnson term of office. The biggest danger to an effective capital spend, might well be a political leader in hot pursuit of photo opportunities.

The sharp, front-loaded profiling, leaves a deep suspicion that this may be the case.
Johnson left London a series of badly negotiated capital liabilities, costing London taxpayers scores of millions, from the Olympic Stadium and the cable car, to the vanity projects, such as ‘Boris Island’ and the Garden Bridge. This is where the ‘serious’ Sunak might do the country a real favour. More measured investment, at a pace which reflects the country’s ability to spend well, will deliver much better results for the country and perhaps take better account of a workforce shrunken by Brexit and swathes of east European labour.

Housing

Sunak announced the conSunak announced the continuation of funding for ‘affordable’ housing. He announced this as “the largest cash investment in affordable housing in a decade”. Did he really mean to draw attention to the fact that no Tory Chancellor in the last 10 years has matched the last Labour Government for affordable housing spend? If he was ok calling out his predecessors, did he mean to convey the fact that he will also not match Labour’s spend in this area?

Any investment in housing is, of course, welcome. But if we are looking to address the gap in sub-market housing, it is clear that Sunak expects the private sector to address what remains a failure of public house building. If the private sector is expected to fill the gap, it needs to be resourced to do so and this budget does not do it.

Last year, only 6,300 homes were built for social rent. More of the same, as Sunak is offering, does not really cut it. Without better targeting of these resources, developers are likely to continue to find themselves in tough negotiations with local councils, especially in urban areas, where levels of homelessness and poverty were not really challenged in the budget. Indeed, the budget will make many of the poorest households worse off, potentially increasing further, the need for social rented housing.

The demand from many councils for ‘genuinely’ affordable housing at social rents, is not likely to fall. There was nothing in Sunak’s announcement to suggest he sees any need to try to assist developers and councils in this area, although reversing the 1% increase in local authority borrowing, imposed in the autumn, is a very welcome and speedy reversal.

Levelling Up

There was much pre-budget discussion about ‘levelling up’ areas of the country to meet the levels of spend in London and the South-East. There is almost no room in the revenue spending profile, to facilitate this. It will not be hard for councils in the north and midlands to point out ongoing differences to public service budgets between the nations and regions of the UK.

I was struck by this rather odd drift into Marxist theory by Conservative Ministers, as though the value of the input must equate to the value of the output. It seems blindingly obvious that one must spend more on health services in London than Lancaster, if only to meet the higher wage levels of nurses in the capital. There again, it must be cheaper to collect the bins in Camden than Cornwall, where the distances are far greater. Surely we should spend more on health and social care in Eastbourne, with its large proportion of elderly residents, than in student-rich Brighton, just along the Sussex coast road?

Rather than focusing on outcomes, the Government seems to have created something of an ‘open goal’ by talk of levelling up fiscal inputs. Anywhere which fails to secure the same per capita rate of spend as London and the South East, will have a ready axe to grind. I can almost write the opposition election leaflets of ‘broken Tory promises’, in the newly-won constituencies today.

Having said that, the only focus for levelling up was in transport, although even the heightened level of investment in infrastructure will make little more than a dent in the imbalance in regional spending. This would need to be sustained over decades. Of genuine interest here though, was Sunak’s announcement of a review into how capital infrastructure projects will be assessed. The Department of Transport’s traditional cost-benefit analysis is long overdue for consignment to the dustbin of history.

The present method will always benefit London over anywhere else in the country. It also fails to properly assess the wider regeneration and development potential new transport could unlock. A genuine review of the present rules, with a commitment to the establishment of broader criteria, will be very welcome and a major step forward in offering up the potential to re-balance spend across the UK. Of course, a commitment to a genuine review must take some time, which brings us back to how you spend in excess of £1bn per month in the first year.

Perhaps the PM will be busy changing nappies and not worrying about early photo opps? Perhaps the new Chancellor, albeit shorn of political advisors, will still manage to ‘tell truth to power’ and tell Johnson he must wait?

Are those pigs I see flying outside my window?nely’ affordable housing at social rents, is not likely to fall. There was nothing in Sunak’s announcement to suggest he sees any need to try to assist developers and councils in this area, although reversing the 1% increase in local authority borrowing, imposed in the autumn, is a very welcome and speedy reversal.

How Stable is the Budget?

I do not intend to go into the handling of the Coronavirus here. The purpose of its inclusion is to bring us back to Harold MacMillan.
Much of the Sunak budget rides close to a number of fiscal rules established. Capital and Infrastructure spend, should not exceed 3% of GDP. He is already very close to that target. Nothing in the budget, aside from specific provision, is factored in for the Coronavirus. The economic forecasts take no account. But if, as the Chief Scientific Officer says, we are four weeks behind Italy, then a significant shut down of offices and workplaces may not be far off. The economic impact to the retail and hospitality sector, alongside that already hitting the airlines, and further on, potentially to construction and house building, could be really significant.

After yesterday’s COBRA meeting, it seemed the Government wanted to delay the peak of the virus to coincide with Easter school holidays, when parents would be making arrangements for holidays or child care and there would be some ‘built in’ economic slowdown.

In response to questions, we were told it was too soon to stop major sporting fixtures. This morning, we awoke to find the Arsenal manager is infected and the Premier League and Football League have shut down the football season for three weeks. This flies totally in the face of yesterday’s advice. Do the football authorities expect to resume the season at precisely the time when the Chief Scientific Officer thinks the UK will be hitting Italian levels of infection?

Advice yesterday was about delaying closures and delaying the peak of the virus. That lasted barely twelve hours. Yet it is significant because it means economic activity will be hit for far longer than the government would have liked.

Forty-eight hours ago, the Chancellor presented a budget which made specific and separate provision for Coronavirus but which was not built into his economic and budget projections, many of which may fall once the virus does hit and which will be exacerbated by earlier closures of workplaces and major events

The robustness of this budget must be therefore highly questionable because of the Coronavirus alone. That’s before we even get to Sunak’s presumption of a smooth and successful passage of Brexit trade talks between the UK and the EU, for which there is scant evidence thus far.

One thing is certain. Sunak will be on his feet again with another ‘statement’ before the year is out and you know why that is.
“Events, dear boy, events”.