When Rishi Sunak presented his first budget almost a year ago he was forced to add last-minute measures to support the economy at the start of the Covid-19 crisis.
On Wednesday the chancellor will put forward his second budget – one he hopes will plot a way out of the economic turmoil wreaked by the pandemic.
In the intervening period Sunak has spent £280bn to protect jobs and businesses and prevent the deepest downturn in 300 years turning into a lasting economic meltdown. As a result the UK’s national debt is £2.1trn and debt as a percentage of output, at 97.9%, is the highest since the early 1960s.
Still, the Thatcherite former hedge fund manager will carry on spending for now. He will tell MPs the Treasury’s “full fiscal firepower” will be used to support the economy including extending the furlough job support scheme until September, according to reports.
Sunak has gone from being one of the least experienced chancellors to present a budget – he had been in the job three weeks – to be viewed as the government’s star performer and a leading contender to replace Boris Johnson as prime minister.
With the UK in a third coronavirus lockdown the economy is expected to shrink again in the first quarter. But the rapid deployment of vaccines to combat the disease offers light at the end of the tunnel with the government pencilling 21 June in for the economy to reopen completely.
Sunak has to balance an unusual array of competing interests for a Tory chancellor. He has repeatedly said the public finances must be brought under control as soon as possible. This chimes with his own instincts and those of many Conservative MPs whose support he will need to become prime minister.
“If we argue there is no limit to what we can spend, that we can simply borrow our way out of any hole, what is the point in us?” he told the Tory conference in October. He told the Financial Times last week he would “level with people” and that the UK’s finances were “exposed” to potential interest rate increases.
Economists have warned that increases in personal taxation at this point could kill the recovery. Tory chancellors’ traditional option of big spending cuts is also off the table.
Voters are weary after a decade of austerity and Johnson is against further cuts. After winning a string of former Labour seats at the 2019 election, the Tories also cannot afford to punish low-income households if they want to protect their majority.
Many of Sunak’s likely measures have been trailed and he has given interviews and produced a glossy video in the past few days to set the tone.
Reports suggest these measures may feature in his budget:
Increases in corporation tax over the parliament, stepping back from George Osborne’s plan to entice business to the UK
Freezing income tax allowances and thresholds to draw in more revenue without increasing the headline rate
Extending support for jobs and businesses until July or later. These include the furlough programme, business rates relief and grants to struggling companies
An extension of the extra £20 payment to universal credit claimants that was due to expire in March
Further support for the housing market, possibly including an extension to the stamp duty holiday beyond March and a government mortgage guarantee aimed at first-time buyers.
Kallum Pickering, an economist at Berenberg, said: “While the UK government’s emergency response to the pandemic has come at a huge expense, the results are impressive. Despite the historic shock to the real economy … the UK has not (yet) suffered a major wave of defaults or redundancies.”
“For all the talk of potential tax hikes in the run up to this budget, we do not expect any serious fiscal tightening on Wednesday. Instead, we expect Sunak to extend emergency policy measures for a few more months to provide a support bridge to the hard-hit parts of the economy.”
The Office for Budget Responsibility will predict rapid economic growth in 2021 as the economy bounces back from the Covid-19 slump but the watchdog will warn of a persistent hole in the public finances, the FT reported. The OBR will forecast a deficit of about £350bn for 2020-21, down from a November estimate of £394bn, the FT said.
Treasury officials have watched a recent rise in government bond yields and have argued the UK cannot be complacent about ultra-low borrowing costs lasting.
Sunak has rejected the idea that low borrowing costs give the government extended breathing space to reduce the deficit. Though some economists argue most of the bonds have been bought by the Bank of England and there is no urgency.
“We went big, we went early, but there is more to come and there will be more to come in the budget,” Sunak told the FT. “But there is a challenge and I want to level with people.”