There are two big ideas underpinning Rishi Sunak’s Budget.
The first is that the United Kingdom needs to worry about the debts it has incurred during the pandemic: hence the deployment of a huge number of revenue-raising measures, including tax rises for most people, and a planned increase in corporation tax from 19 per cent to 25 per cent for large firms in 2023. The rhetorical argument for austerity is back: albeit for austerity via tax increases, rather than spending cuts. (Don’t forget, though, that planned cuts in local government spending are still to come and may be a cause of social pain and political difficulty in coming years.)
That, of course, creates a political problem for Labour: Sunak has appropriated many of the party’s plans to increase revenues from its 2017 and 2019 manifestos. But he has not adopted any of the spending priorities from those manifestos as well. That could cause a real difficulty for Labour, whose shadow chancellor, Anneliese Dodds has continued to argue, just as her predecessor John McDonnell did, that in normal times day-to-day spending must be financed through taxation, not borrowing.
There is little economic evidence that debt reduction needs to be an immediate priority for the government, but the political and polling evidence shows that behaving as if it should be a priority continues to be electorally fruitful for the Conservatives. Absent an economic shock, it is hard to see what will shift that.
[Hear more from Stephen on the New Statesman podcast]
If Sunak implements those corporation tax hikes in 2023 (and there is a distinct possibility that he will not), it means Labour may go into the next election having to find yet more sources of revenue just to stand still in relation to its spending commitments from 2015, 2017 and 2019.
That said, the opposition’s biggest source of political comfort may well be Sunak’s second calculation: that UK doesn’t need much economic stimulus to ease its way out of the pandemic, and that while the economy will be smaller as a result of coronavirus, it will not be especially fragile.
That can be seen in a number of measures: that the £20 uplift to Universal Credit will end in six months along with the subsidy schemes for businesses, and that the minimum wage will be increased. While it is the smallest increase in the statutory floor since 2013, it comes at a time when most low-wage sectors are under growing financial pressures due to the pandemic, and in which the return of usual pre-pandemic economic activity is not certain.
It can also be seen in the absence of stimulus measures. Other than a hefty inducement for big businesses to invest (a “super-deduction” from their tax bills of up to 130 per cent for the next three years) this is the Budget of someone convinced by the argument made by the Bank of England’s chief economist Andrew Haldane: that the British economy won’t need much to get going again after the pandemic.
Is Sunak right about the state of the British economy? Quite possibly: I’m instinctively inclined to the view that if there is an economic lag as the UK reopens, it will be created by debts accrued by businesses and households during the pandemic, not changes to demand or consumer behaviour. Sunak’s grants look like to be about the right approach, though he may be underestimating the amount of debt relief businesses in particular need. The comparison with Joe Biden’s much bigger $1.9trn stimulus package is not particularly helpful in some ways, because if Sunak is wrong he can very easily revisit and get parliament to vote for a bigger deal: the Biden administration has to go as hard as possible because it is highly likely it will only get one shot at stimulus.
The problem for Sunak is two-fold. If he’s right, then there is a very real possibility that Biden’s stimulus package, particularly when coupled with the added but necessary costs of the global green agenda here and elsewhere, means that inflation returns as a big political and economic problem in 2022. Those stealth rises in income tax may not feel so stealthy for British households, while Sunak’s commitment to keeping the UK’s benefits bill at a historic low may become politically fraught, as well as painful for people on Universal Credit.
If he’s wrong, of course, Sunak’s problem will be more straightforward: a sluggish British recovery marked by bankruptcies and unemployment. He can come back to parliament to fix the economic consequences of that: he may not be able to find a political solution so easily.