UK budget 2020: experts react

New chancellor, Rishi Sunak delivers his first budget. Victoria Jones/PA Wire/PA Images

Rishi Sunak has delivered his first budget as UK chancellor and the Conservative Party’s first budget since winning the 2019 general election. Here our panellists give their take on his announcements. Stay tuned for further updates and follow @ConversationUK on Twitter.

Healthcare

Gabriella Conti, Associate Professor in Economics, UCL

It is certainly welcome that more public resources will be devoted to the NHS, although it would have been better to do this less in “crisis-response mode” and more via sustainable spending.

The budget provides more than £6 billion of further funding to strengthen the NHS in England, though not all the details of how the extra funding will be used have been spelled out. The chancellor, Rishi Sunak, seems to assume the coronavirus outbreak will be shortlived. We all hope so, but it is reassuring to know that the NHS has been promised all the resources it needs.

Dealing with a surge of COVID-19 cases like that seen in Italy will require a major effort. The NHS managed to cope with the swine flu scare in 2009/2010, but it is struggling today, missing key performance targets and with ICU beds already at high capacity.

It is certainly reassuring that social care is included in the emergency response fund – there is likely to be a significant increase in demand – and that the government reconfirmed its commitment to long-term reform of adult social care. But it is worrisome that the refinancing and reform of social care seems to have been postponed yet again.

It is welcome that the health infrastructure plan has been confirmed and the level of capital investment protected. Funding has also been provided to replace diagnostic equipment and to increase staffing – in particular nurses and primary care doctors and professionals, but this needs to be supported by a longer term plan for recruiting and retaining the workforce.

But one wonders whether enough money has been allocated to try to avoid a bottleneck in GP appointments in the first place by investing more in prevention, since public health seems less prominent in the budget. There was no provision for any new funding for the public health grant next year, despite repeated cuts to vital services (such as those targeting the early years).

While freezing duty on beer, cider, wine and spirits might help the alcohol industry and pubs, it is a price cut in real terms – which is likely to cost the public purse more, partly counteracting the measures supporting health and social care. The increase in tobacco duty might partly offset this. The abolition of the “tampon tax” is also welcome. Overall, we need more to improve people’s health in the long term.

Cam Donaldson, Yunus Chair for Social Business and Health, Glasgow Caledonian University

Given its immediacy and size, coronavirus has taken prominence in Rishi Sunak’s first budget, with a mix of initiatives which were called for by various commentators, such as reduced business rates, a hardship fund, sick pay extensions and increased funding for the NHS.

Whenever there is a crisis in the NHS, governments always seem to fall into the trap of providing funding for it, when actually the bottlenecks and resource constraints often lie elsewhere. If we need to move people out of hospital to help deal with the coronavirus, then replacing some of our decimated social care budgets might be a good place to start. Let’s hope some of the increased funding finds its way there.

Overstretched: NHS services. Shutterstock

Increased funding (£200m) for flood defences has been announced, as has £600 billion for various infrastructure projects. The former is unlikely to appease communities in the flood “plains” and the latter is accompanied by a delay to a national infrastructure strategy, which is really the basis of the levelling-up promised during and after the general election. More on them will come, no doubt, at the next budget in November, health permitting.

Keeping fuel duty steady will not please the environmentalists. Public health experts will also not be pleased about the same outcome for our booze, but it will at least give many some scope for enjoyment whilst we in the UK contemplate the many, and increasing, potholes ahead.

The macroeconomy

W David McCausland, Professor of Economics, University of Aberdeen

Rishi Sunak’s first budget, just months into the job, is in large part born out of necessity. The novel coronavirus has prompted a £30 billion package to fund increased health spending and mitigate the effects of illness, particularly for small firms. The abolition of business rates for small firms in the retail, leisure and hospitality sectors in England is particularly welcome.

Election promises for infrastructure investment take a further £175 billion, including a number of important and overdue road improvements. A further year’s freeze of fuel duty is a welcome relief for motorists. Though this does come at the cost of additional borrowing, total borrowing is still low at just over 2% of GDP – and entirely appropriate given global uncertainty.

Indeed, there is still room to increase borrowing further should the need arise, without sacrificing an appearance of prudence. It would have been desirable to have gone further with firm commitments to more infrastructure investment, particularly to rail projects in the North.

John Weeks, Professor Emeritus of Economics, SOAS, University of London

Two closely related promises stand out from the detail in this budget: the stated intention to increase spending by £30 billion and the proposal to review Treasury fiscal rules. If the £30 billion proves in practice a net increase when adjusted for inflation, it implies a fiscal boost on current annual spending of 3.6% (£833 billion through to January 2020). Realising this increase necessarily implies the proposed review of the Treasury’s deficit rule, because it might breach the Tory manifesto commitment to cover current expenditure by taxation.

The proposed multi-year increase in infrastructure spending, £175 billion may sound a lot, but is still substantially less than the £400 billion Labour promised in its 2019 election manifesto. Nonetheless, it reverses the downward trend of the past decade of Conservative-led rule. Support for local government in this budget is minimal, despite it being one of the biggest victims of austerity.

The combination of the stimulus and review of fiscal rules is significant. The basis is set for a weakening of the generations-old dominance of Treasury “prudence” over fiscal policy. This change should be endorsed by the Labour opposition. A future Labour government would find the implementation of its policies easier as a result. The details in the budget require close inspection and critique, but it appears that we have a clear step towards the end of austerity.

The view from Europe

Karl Schmedders, Professor of Finance, IMD

It was not until the one-hour mark of his 63-minute speech that the chancellor mentioned the infamous “billions sent to the EU”, which will now be spent in Britain. Understandably, the global COVID-19 pandemic dominated the beginning of Sunak’s speech. He then focused almost entirely on fulfilling Conservative manifesto promises such as moving 22,000 civil servants out of central London and achieving public net investment of £600 billion over five years – the largest in relative terms since 1955.

Very little was said on how the government will pay for the huge spending increases without blowing right past the fiscal rules set by the previous chancellor. Sunak didn’t once mention international competitiveness and how the government intends to address the increasing productivity gap between UK workers and those of the largest EU economies. International trade was entirely absent. It was very much an inward-looking, self-centred speech. Is this the way forward in the global economy (if indeed there still is one).

The government budget is clearly pandering to traditional Labour-supporting Leave voters who defected to the Conservatives at the 2019 election by making expensive fiscal promises to economically weak areas including the north-east of England and the Midlands. Increasing the immigration health surcharge from £400 to £624 to support the NHS will not be more than a wrinkle in the budget, but will sound good to voters unhappy about immigration.

For all his talk on COVID-19, Sunak completely ignored the negative impact the outbreak will have on 2020 growth. The forecasts for 2020 and the following few years remain well above 1% annual growth, which is optimistic, given that UK growth in the three months before the virus outbreak was non-existent. Depending on the length and intensity of the pandemic, many countries including the UK are likely to see a severe and long recession.

In the fiscal year ending March 2010, the budget deficit of the UK was 10% of GDP. This decreased almost linearly to 1.2% for the fiscal year ending March 2019. If the proposed new budget is really implemented, these years of austerity will abruptly end. Combined with economic growth probably much below the current forecasts, we will likely see a ballooning government deficit instead.

Economic development

Phil Tomlinson, Professor in Industrial Strategy, University of Bath

The government appears to have finally recognised what many economists have been saying for years: with low interest rates, government can borrow cheaply to boost growth. This is going to be needed after the last “lost decade”, with the economy already stagnant and dark clouds on the horizon in the shape of coronavirus disruption and Brexit uncertainty. Indeed, over the next five years, UK economic growth is forecast to stutter along at an average of 1.4%, significantly below its long-run trend.

Before the budget, there was much talk about the government’s “levelling up” agenda and doing more to raise productivity and prosperity across the whole of the UK - especially in those “left-behind” regions. And this is what the new chancellor has delivered.

The announcement of £600 billion for new infrastructure investment by 2025 is, on the face of things, eye watering. But this figure only represents an additional £100 billion on the government’s existing plans and some of this new money is partly a reversal of the substantial cuts in infrastructure spending over the past decade.

Nevertheless, it will bring public investment up to around 3% of GDP – the highest level since 1979 (though not as high as percentage of GDP as in the 1948-1979 era). This new public investment should hopefully lead to more private investment too. We await further details in the publication of the government’s National Infrastructure Strategy, which has been delayed.

Proposed changes to how the Treasury calculates the benefits of infrastructure projects may also benefit lagging regions. Rather than solely focusing on public projects most likely to generate a higher return – which tends to favour those in London and the south-east – the new proposals will hopefully give more weight to projects across the country to reduce regional inequalities. There are plans to create dedicated trade envoys for the regions, and to relocate Treasury officials around the country. The crucial question here is whether this will actually shift power to the regions? There is likely to be an increasing focus on the devolution agenda and implementing local industrial strategies.

There is no easy fix when it comes to reviving lagging regions. New money for infrastructure projects will only go so far. Renewal also requires investment in better skills, support for business and knowledge networks, strong local public services and good local government. Many of these have been significantly weakened through a decade of austerity cuts.

The abolition of business rates for small firms will be welcome, especially for those in retail in struggling towns and city centres. Most of this revenue goes to local councils – and it will be interesting to see if they will be compensated by central government.

Of course, the biggest issue is still Brexit and the very real possibility of ending the transition period without striking a trade deal with the EU. Most regions in the North and Midlands – those “red wall” seats that turned blue in the last election – are dependent on manufacturing and frictionless trade with the EU. All the evidence suggests a no-deal Brexit will be catastrophic for them.

Tax

Gavin Midgley, Senior Teaching Fellow in Accounting, University of Southampton

In a budget that made grand gestures towards the electorate with its promises of increased investment and public spending, its announcements on tax were far more subdued. For income tax, as expected there were no changes in the personal allowance nor the higher rate threshold but a modest increase in the threshold for national insurance contributions.

Combined with no changes to the corporation tax rate as well as the fact that the government growth and borrowing figures haven’t taken into account the effects of COVID-19; and an indication from the chancellor that the next budget will take place this autumn, one could be left with the feeling that this trod water more than anything else.

This trepidation was also apparent in the chancellor’s much-touted environmental measures – laudable plans to improve transport links in cities and a welcome increase in car-charging hubs were somewhat undermined by a freeze in car fuel duty and a two-year deferment in the increase in red diesel duty.

It could be argued that the country has inherited a government that plays sympathetic overtures towards those campaigning for a greener future – but, as with previous governments, has found its own reasons as to why now is not the right time to rock the boat with businesses and motorists.   The abolition of the “reading tax” – the VAT incurred on digital publications – has been welcomed by publishers and literacy campaigners, but this measure could increase the discrepancy in fortunes between online retailers and the much-loved but underperforming physical bookshops.

Business

Ross Brown, Professor in Entrepreneurship and Small Business Finance, University of St Andrews

Small business (SMEs) took centre stage as part of the chancellor’s £30 billion budget package to deal with the coronavirus crisis. Increasing resilience in SMEs is crucial to help overcome major economic shocks and requires bold and decisive action. As research shows uncertainty caused by Brexit and the global financial crisis is deeply harmful for UK SMEs.

The chancellor announced a series of ambitious new measures designed to allay uncertainty in SMEs, augmenting the earlier announcement by the Bank of England to establish a new term funding mechanism for SMEs. This includes a temporary “coronavirus business interruption loan scheme” offering loans of up to £1.2m to SMEs experiencing a downturn in business due to coronavirus.

While on paper these new lending measures seem appropriate, they are very supply-side focused and assume there will be uptake and demand from SMEs. As the global financial crisis sharply illustrated, when faced with chronic uncertainty SMEs tend to become ostrich-like when dealing with banks: sticking their heads in the sand rather than seeking out funding. Chronic uncertainty typically leads to massively reduced demand for credit, with SMEs unlikely to borrow more.

A number of businesses were struggling before coronavirus. Willy Barton / Shutterstock

Probably of greater significance, the chancellor also announced interesting plans to offer £2 billion for small businesses to refund the cost of sick pay caused by coronavirus. Firms with fewer than 250 staff will be refunded for sick pay payments to their employees for a period of two weeks. The government is also offering £2 billion of cash grants of up to £3,000 for up to 700,000 SMEs to help deal with the crisis with little or no strings attached to the grants.

These new flexible measures are likely to prove very popular to SMEs and seem like very sensible measures to help them adjust to the coronavirus shock, which comes at a time of ongoing uncertainty due to Brexit. If these measures prove insufficient, the government may need to undertake further aggressive measures such as a reduction in VAT for SMEs.

Research and development

Madeleine Gabriel, Head of Inclusive Innovation, Nesta

The chancellor announced an increase in public spending on research and development (R&D) to £22 billion per year by 2024, more than doubling the current budget. The UK currently lags other leading economies in innovation investment – and this increase is important if the country is to reach the government’s target of investing 2.4% of GDP (compared to 1.7% in 2017).

Sunak announced £800 million for a new “blue skies” research agency modelled on the US Advanced Research Projects Agency. ARPA is famous for helping to bring forward many of the big innovations from the past century, from the internet and the graphical user interface to GPS and self-driving cars.

This commitment indicates a government focused on breakthrough technologies and finding the industries of the future. It also sees innovation as important to reaching a net-zero carbon economy by 2050 – the energy innovation programme will be at least doubled.

The budget was quieter on using innovation to tackle other societal problems, such as adapting to an ageing society. The bigger R&D budget should be more mission-driven – and our research with the public shows this is what they want too.

Finally, more resource requires more accountability and public scrutiny: £22bn a year is more than twice what central government spends on policing. The government needs to be more open about how money is being spent, and the public should be more involved in setting priorities. At the same time, the public and future governments will need to demonstrate patience and appetite for risk: we can’t tackle big problems without failures along the way. This means empowering innovators, while engaging with the public and taking their views into account.

Pensions

Craig Berry, Reader in Political Economy, Manchester Metropolitan University

To incentivise private pensions saving, pensions tax relief costs the government around £36 billion per year (or £19 billion, if you subtract the income tax paid towards pensions). Given the limited evidence that the savings incentive actually works, and very clear evidence that the most affluent savers benefit disproportionately, chancellors often hint at cuts to this bill, but are rarely brave enough to follow through.

Sunak knows the script. He actually increased the cost of pensions tax relief (by around £500 million per year) by partially reversing some of the savings made by one of his predecessors at the Treasury, George Osborne. Surgeons working in the NHS have long complained about how Osborne’s tweaks to the amount of pensions tax relief that high earners can access each year penalised this group in particular. The coronavirus context probably made the concession inevitable, but high earners other than surgeons will inevitably benefit.

There is no equivalent boost to the pensions savings of lower earners. But there was an intriguing promise in the budget’s small print to call for evidence on a bizarre anomaly in the pensions tax regime which does affect the lowest paid.

Many low earners benefit from pensions tax relief even if they are not taxpayers (because they earn less than the personal allowance) if their pension scheme chooses the “relief at source” method of applying tax relief. Yet people in schemes where the alternative “net pay arrangement” is applied are treated differently: the savings of low-earners do not receive a fiscal boost even if their income is identical. When it comes to pensions tax administration, this group is obviously not as vocal as the surgeons. But the loophole should nevertheless be closed.

Want to write?

Write an article and join a growing community of more than 100,900 academics and researchers from 3,223 institutions.

Register now