COMMENT: When chancellor Rishi Sunak delivers his spring Budget, I will be watching with greater trepidation than I have any previous government economic announcement since the global financial crisis.
This Budget could make or break the UK’s post-pandemic economic recovery, and leave scarring that goes well beyond that which is already evident.
What I hope to see is a Budget that will support a bold vision for the UK’s future. One that takes advantage of low borrowing costs to make strategic investments in infrastructure and productivity in keeping with the national levelling-up vision at the heart of the Conservative manifesto, and for which I have long been an advocate.
Like many others, however, I fear that the focus may include well-intentioned but premature policies seeking to redress a level of national debt not seen since World War II by sacrificing a prime opportunity to bring about long-term regional rebalancing in order, simply, to balance the books for ideological reasons.
With the Office for Budget Responsibility forecasting a budget deficit of £394bn for 2020/21, the equivalent of 19% of GDP, it is easy to understand the nervousness and the interest in raising taxes to tackle rising debt levels.
My last-minute message to the chancellor is to not fret over what will prove to be a transient figure, but to look at the broader sustainability of debt in the setting of ultra-low interest rates.
How to deal with the debt
In the 12 months to the end of January 2021, public sector net debt to GDP may have risen from 83% to just under 100%, but the 12-month total of interest payments to service that debt has fallen from around £47bn to £38bn. This shows that the UK’s current level of debt is sustainable. In fact, in addition to more emergency stimulus and support, the government should begin to invest in infrastructure and other productivity-enhancing measures to support future growth.
The UK will not liquidate its debts through further austerity. The previous 10 years of austerity only managed to stabilise debt levels, with little progress in reducing them. Wealth generation is the key to managing the national debt – and increasingly the stars may be coming into alignment.
The GDP quarterly data released on 12 February showed that the economy grew at a rate of 1% quarter-over-quarter during the final three months of 2020. This was positive news, although the media focus was on the record annual rate of contraction. This was old news, as the real contraction occurred back in Q2 2020 when the economy was closed by government mandate.
In the past two months, business sentiment has been improving due to the EU/UK trade agreement and the UK’s exit from the EU market. However flawed and fraught the agreement and subsequent relations appear to be, at the least, many large international businesses finally had the regulatory certainty that they had been seeking.
The FTSE is up by 17% against its 30 October UK lockdown low. Likewise, sterling is up by around 6% against its pre-pandemic level and pre-election levels, and topped $1.40 for the first time since 2018. February’s ‘flash’ UK purchasing manager index reading from IHS Markit (49.8) reflects the ongoing shutdown of much of the services sector, but business expectations for the next 12 months were the highest since April 2014, founded almost solely on expectations of a strong economic bounce back due to the vaccine rollout.
Regional rebalancing must restart
In short, positive sentiment is building, and the logjam in business investment may finally be starting to break up. Judging by January and February activity levels in London office markets, the hiatus in tenant decision-making may also be coming to an end.
This is not the right time to bring in significant tax rises or introduce new regulatory changes.
Instead, the chancellor should continue to nurture this positive sentiment until the economy recovers back to its pre-pandemic level and reverts to the sustainable trend growth forecast by mid-2022.
The regional rebalancing agenda was delayed last March due to the pandemic. Now that a vaccine programme is underway, the government should return to its original focus on investment and levelling up, and make it central to the country’s economic recovery not only from the pandemic, but from almost five years of business hesitation brought on by the vote to leave the EU in 2016.
The Covid-19 experience has also persuaded me that we are on the cusp of a major paradigm shift in terms of technology, economic transformation and sustainability. The green agenda’s time may also be arriving, prompted in no small part by generational change and enabled by technological advance and a sense that large-scale change is possible. This was a key lesson of the pandemic and the rise of remote working.
My hope is that the chancellor gets it right in his Budget and creates the conditions to enable these transformations. A misstep now would be a retrograde step, and could set the UK economy back for another five years. Given the imminent challenges the UK faces in re-establishing itself as an independent and positive political force, the long-term repercussions are unthinkable.
Walter Boettcher is UK chief economist at Colliers
