Sunday, November 08, 2020
After another handout from Sunak, how do we pay for it?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Like a lot of other people, I am finding that there is something missing in my life at the moment. It is not just that, thanks to the second lockdown, I can’t browse in a non-essential shop, sit in a pub or restaurant, have a haircut or beauty treatment, or play tennis or gold. I haven’t played golf for a while but in my case it was always socially distanced, most of the time trudging through undergrowth in search of lost balls.

No, apart from all those, I am missing the budget. For people like me the run-up to the budget always provides plenty of material, whether it is speculation of tax changes that may or may not happen, or trying to guess the rabbit that the chancellor will pull out of the hat.

Sadly, however, the November budget has, like the other things I mentioned, fallen victim to the coronavirus. The two big “fiscal events” planned for this autumn, the budget and a three-year comprehensive spending review, have been replaced by one tiddler, a one-year spending review due on November 25.

There is much anguish in Whitehall over the cancellation of the three-year spending review. Many hours have been wasted in government departments preparing for it, at a time when there have been plenty of other things for them to be getting on with. It has also created new uncertainty about medium and long-term strategy.

The Treasury would say that, instead of a proper budget this month, we have had a series of mini budgets. They have come thick and fast, sometimes at a rate of one a month, and we had another on Thursday.

That, however, creates a sense in which policy is rudderless. Rishi Sunak is being forced to provide more and more support for the economy, either by the coronavirus, or by Downing Street, or a combination of the two. He had hoped by now to have said farewell to the furlough scheme. Indeed, as a I wrote last week, he hoped to have done so many months ago.

Now, in the mother of all rushed U-turns he has extended it and the self-employment scheme until the end of March, meaning that it will be around – depending on a January review – for more than a year. There is good news and bad news in this. The good news is that many people who would have become unemployed will stay on company payrolls. The bad news is that it could be seen to imply that serious restrictions, if not lockdown, will be in place until the spring, with no guarantee that there will not be another U-turn then.

The chancellor’s U-turn has gone down badly with experts. Paul Johnson, director of the Institute for Fiscal Studies, said nothing had been learnt since this spring: the new package was “wasteful and badly targeted for the self-employed”, with no effort to target sectors and viable jobs for employees.

The chancellor did not have a budget, but in short statement in the House of Commons he handed out tens of billions. We cannot be sure how much. The Treasury estimates that extending furlough costs between £2bn and £10bn a month; the self-employment scheme £7.3bn and money allocated to the other nations of the UK under the Barnett formula £2bn. Against this, the job retention bonus he announced for employers in September, which was dependent on the furlough scheme ending, ahs been scrapped. A conservative assessment was that the furlough extensions (for lockdown and beyond) and the other measures will cost a further £35bn to £40bn.

The question, and it is one I get asked a lot, is how to we pay for all this. £5 million was an important sum for the Treasury when it was at loggerheads with Greater Manchester over Tier 3 support, and money may have been at the heart of the government’s refusal to provide meal vouchers to underprivileged children during half-ter. Suddenly, however, whether Sunak wanted to or not, the taps have been turned on full. What can and will be done to repair the public finances?

The chancellor could, of course, do nothing on the assumption that the Bank of England will always be around to make things easy for him. Britain has won praise for the co-ordination of fiscal (the Treasury) and monetary (the Bank) policy during the pandemic. On Thursday the Bank not only provided a further £150bn of quantitative easing (QE) but helpfully moved its announcement forward to 7am, to leave the airwaves free for the chancellor at lunchtime.

The Bank’s purchases of government bonds (gilts) make even a huge budget deficit – which could hit £400bn or 20% of gross domestic product this year – easier to fund and keeps the cost of doing so low. The Bank, coincidentally, has announced £400bn of additional QE.

This is not, however, a permanent solution. One of the Bank’s deputy governors, Sir Dave Ramsden, said recently that the Bank was getting closer to its self-imposed limit for QE. Thursday’s £150bn announcement ahs taken it much closer to that limit, leaving only £100bn or so to go. It has already become the dominant holder of gilts. There would still be demand for gilts after the Bank stopped buying, from pension funds, insurance companies and overseas buyers, but that is not limitless either, and investors might well require a higher return, pushing up the government’s cost of borrowing. When the Bank is buying, the cost of borrowing is zero.

The chancellor could raise taxes and/or restrain public spending. Neither is easy. On public spending, the government is keen to avoid being branded with a return to austerity. Sunak is similarly hobbled when it comes to tax, because of the government’s manifesto commitment not to raise any of the main taxes; income tax, VAT and National Insurance.

That is why the summer speculation, emanating from the Treasury, was about raising taxes on business, including lifting the corporation tax rate from 19% to 24%, equalizing the treatment of capital gains and income and abolishing higher rate pension tax relief. The corporation tax hike could bring in £15bn or so, when fully implemented – which would take some years - capital gains tax a few hundred million. Replacing higher rate pension tax relief with a flat rate of, say, 30% would be revenue neutral. Limiting the relief to the basic rate of 20% would bring in some revenue but act as a powerful disincentive.

We come aback to a familiar dilemma. Closing a large fiscal hole with taxation requires higher taxes for everybody, which is why the International Monetary Fund, in its latest assessment of the UK economy, suggested in coded language that it will be necessary to raise some of the main taxes. There are ways of doing this by sticking to the government’s promises, for example by freezing the personal tax allowance and higher rate threshold and extending the range of goods and services subject to VAT. You would still struggle, however, to raise the £43bn a year in extra taxes that the Institute for Fiscal Studies says is necessary to stabilize government debt at 100% of GDP, a figure once considered to be too high for comfort.

Can we grow our way out of it? After all, after this year’s huge plunge, the economy should show its best growth for nearly half a century next year. The key, however, is not a short-term bounce but sustainable recovery, and that means reviving productivity growth. Successive assessments of the public finances by the Office for Budget Responsibility have stressed the importance of productivity growth for the public finances.

Talking about reviving productivity and actually doing so are, though, two very different things. Adding to government debt to help the economy is but the work of an afternoon, as the chancellor demonstrated the other day. Tackling it afterwards is a job for the long haul.