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Budget 2020: Economics view

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This was a Budget of two halves, with the first being a package of emergency measures to mitigate the short-term economic impact of Covid-19, and the second being a more traditional Budget focused, in particular, on higher public investment in infrastructure and R&D. In his longer-term strategy, the chancellor is taking a calculated risk by committing now to significantly higher public spending when there are many economic uncertainties ahead.

The chancellor announced a £12bn package of short-term measures to support the NHS, vulnerable people and businesses to bridge over what he expects to be a severe but temporary hit from Covid-19. Added to the Bank’s interest rate cut and other measures to boost credit flows this morning, this should go a significant way towards mitigating the economic impact of the virus in the short term. The chancellor also made clear that more money would be made available for this if needed.

Looking beyond the immediate Covid-19 crisis, the chancellor also announced, as expected, a very large increase in public investment over the next five years. There will be significant additional funding for transport and communications infrastructure, housing and R&D. 

Higher public investment should boost longer term economic growth, which is critical as the OBR’s new forecasts imply only modest trend GDP growth of around 1.5% per annum in the medium term beyond the period of the Covid-19 crisis (see table). The OBR’s new forecasts are of less relevance for 2020 as they were finalised in late February and so exclude both the latest evidence on the potential economic impact of Covid-19 and the package of measures announced in the Budget to counter this impact. But they are still relevant for later years of the forecast period, where they are on average slightly less optimistic on trend growth than the previous OBR forecasts from a year ago.

Comparison of key OBR forecasts in March 2020 and March 2019

Real GDP growth (%) 2019 2020 2021 2022 2023
Spring Statement (March 2019) 1.2 1.4 1.6 1.6 1.6
Budget (March 2020)* 1.4 1.1 1.8 1.5 1.3
Public sector net borrowing
2019/20 2020/21 2021/22 2022/23 2023/24
Spring Statement (March 2019) 47.6 40.2 37.6 35.4 33.3
Budget (March 2020)* 47.4 54.8 66.7 61.5 60.2
Public sector net borrowing
(% of GDP)**
2019/20 2020/21 2021/22 2022/23 2023/24
Spring Statement (March 2019) 2.2 1.8 1.6 1.5 1.3
Budget (March 2020)* 2.1 2.4 2.8 2.5 2.4

*Excluding short term impact of Covid-19 on the economy and the effect of the set of measures in the Budget to counter this.

**Excluding borrowing of public sector banks.

Source: OBR

The inevitable implication of higher public spending without net tax increases is higher public borrowing: the average annual budget deficit over the four years to 2023/24 is now projected by the OBR to be around 2.5% of GDP, as compared to around 1.5% of GDP previously. The implied average increase in annual borrowing is over £20bn a year, rising to £27bn by 2023/24.

The chancellor argued that his new spending plans were still consistent with public debt being slightly lower as a share of GDP at the end of the forecast period. But the pace of fiscal consolidation is now planned to be much slower than under either George Osborne or Philip Hammond, with net public debt stuck at around 75% of GDP in 2024/25.

On the ‘golden rule’ of borrowing only to invest by 2022/23, the comfort margin with which this is met is now only around 0.5% of GDP, much less than in previous plans. In the absence of any major net tax rises, which we did not see in this Budget, local authorities and non-priority departments (excluding areas like health, schools, defence and police) could face continued constraint on their day-to-day spending.

Overall, in his longer-term strategy, the chancellor is taking a calculated risk by committing now to significantly higher public spending over the next five years when there are many economic uncertainties ahead. These are not so much in relation to Covid-19, which will hopefully be only a temporary problem, but rather to the UK’s future trading relationship with the EU and the wider global trading environment, which remains relatively fragile. Time will tell if this gamble pays off.