Britain after Brexit: An agenda setting Budget

The economic consequences of the pandemic could have been worse …

Hard though it would have been to imagine a year ago, the Chancellor would have been cheered by today’s Office for Budget Responsibility (OBR) forecast of 4% GDP growth in 2021 after a fall of 9.9% in 2020. At many points in the last 12 months, the situation appeared to be heading for a much worse situation than the one we now find ourselves in.

Even so, spending money was the easy part; the real work starts now. As the Chancellor stood up to deliver his Budget speech today, his audience was looking for action on three fronts: smoothing the transition out of lockdown; setting out a vision for the medium- to long-term development of the economy; and explaining his plans for sustainable public finances.

Positive short-term support …

There was a welcome extension of support for both businesses and households in the Budget. Having had to return repeatedly throughout the last year to offer further fiscal support than was initially outlined, the Chancellor adopted the approach of “going long” with support extending beyond the planned end of restrictions on activity in June.

The Chancellor is now experienced at spending and continued to do so: support for businesses on rates, VAT and loans; an extension of furlough and a £20 uplift in Universal Credit to help individuals; an extension of the Stamp Duty holiday to keep the housing market steady; and no increases in income tax, VAT or National Insurance.

In addition, there was a recognition that ‘more of the same’ will be insufficient to support a strong recovery, and that more needs to be done. The Chancellor announced a series of more targeted initiatives: restart grants for the hospitality, personal services and retail sectors; support funds for the arts and sport; training and apprenticeship funding to help young people into the labour market.

There were some significant gaps, such as funding for local authorities and the NHS, no mentions for social care and no additional help for some groups like those self-employed people who have missed out on the schemes deployed to date. But, it was a substantial package that should help the economy through the spring.

… balanced by concern over paying for it …

After setting out his plans for short-term support, the Chancellor turned to repairing the public finances. That the Chancellor chose to talk about borrowing before growth gives an insight into his thinking. The experience after World War II points to growth as the best way to repair the public finances: increasing the size of the economy increases the available resources to fund interest payments and reduce borrowing.

Alongside a series of moves to increase revenue, including a large increase in corporation tax and the freezing of the personal allowance, the Chancellor pulled a rabbit out of the hat: a huge increase in capital allowances. Two years of allowable deductions of 130% of capital investment is a significant move and one that is likely to position the UK very effectively to capitalise on the supply chain revolution EY’s research has already identified as in progress.

… and little to boost levelling up …

As well as affecting the economy’s base and weakening the public finances, the pandemic response has slowed the Government’s desire to press forward with its plans to reshape the UK economy. Businesses and investors have heard the messages on ‘levelling up’ and ‘net zero’ and are now keen to understand the detailed shape of the potential opportunities.

A fund to support SMEs improve the skills of their management teams and to deploy technology faster and more effectively is an innovative way to tackle the UK’s productivity problem. This, together with enhanced capital allowances, ought to improve the economy’s efficiency. However, both the levelling up and net zero commitments are very ambitious, and it still appears that the Government has yet to design a convincing strategy to deliver on its aims.

Specifics on building a green economy and levelling up were limited in the Budget and were not of the scale necessary to transform the economy. Although a UK Infrastructure Bank is a welcome innovation, the resources available to it are relatively small.

The award of the concessions for freeports was saved for last, demonstrating the store placed in this policy. However, the evidence does not suggest that this will lead to a significant incremental boost to the economy. While a few additional places will benefit from new town deals, there were few policies in the Budget for businesses keen to invest in levelling up opportunities.

… stay tuned

Government is now more involved in the economy than it has been for some time. As the pandemic eases, policy makers will have more resource to devote to articulating their plans for the future shape of the economy. As yet, as the OBR forecasts confirm, faster long-term growth and an economic transformation remain elusive.

Join EY's webcast on Thursday, 4 March, for the analysis of the UK Budget. Our tax specialists and EY ITEM Club will discuss the economic impact of the Chancellor’s announcements and assess the key tax implications for individuals, employers and businesses.