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Economy: Sunak defies downward forecast

In his maiden Budget speech, Chancellor Rishi Sunak immediately got to grips with the coronavirus effect, which has already steered the official economic forecasts off course.

11th Mar 2020
Commercial Production Editor AccountingWEB.co.uk
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Economy budget

The Chancellor, Rishi Sunak, noted during his speech that the virus and the uncertainty it had caused had already caused a downgrade of the the Budget forecast produced by the Office of Budget Responsibility (OBR).

In its March 2020 report, the OBR explained that, in addition to its impact on public health, “the coronavirus is likely to have a significant adverse effect on the economy and public finances in coming quarters”, but that “neither the size nor the duration of this effect are possible to predict with any confidence”.

In a post-forecast assessment, the OBR predicted an increase in the budget deficit of between 0.1% and 0.5% of UK GDP in 2020.

“Asset prices have moved sharply since we closed the window for financial market data on 11 February. These movements alone would change our fiscal forecast,” the forecasters noted. By 6 March, London equity prices had fallen 13% and oil prices by roughly £7 a barrel.

The cumulative effect of these dips – for example by reducing the capital gains tax raised from lower value equity disposals – could be £3.7bn in 2022-23, while debt interest spending would drop by around £1.5bn on the same timescale. “Other things being equal, borrowing would be £2.2bn higher,” the OBR advised.

Ultimately the impact on public finances over the medium and longer term is likely to be less significant, “unless the outbreak inflicts lasting damage on the economy’s supply capacity”, the OBR noted.

This year, the OBR is projecting growth of 1.1%, to be followed by a jump to1.8% in 2021, then 1.5% in 2022 and1.3% and 1.4% in the following years.

OBR forecast

Source: ONS, OBR

In his speech, Sunak attempted to counteract these downward forces by announcing an investment programme of £170bn over five years, which is expected to boost growth by 0.5% of GDP and increase long-term productivity.

Support for businesses

The coronavirus outbreak has already had an impact on sectors from hospitality, events and travel. Some £30bn of spending earmarked for 2020-21 is being committed to lessening its economic effects.

People being unable to work and businesses struggling to find cash for wages would suppress demand, the Chancellor acknowledged in his speech, but bolster by the OBR analysis, he added, it “will have a significant impact on the UK economy”... but “it will be temporary”.

The coronavirus measures include allowing statutory sick pay, not just for those infected, but also for those advised to self-isolate, even if they don’t present any symptoms.

To ease the burden on businesses the Chancellor said they will be refunded by the government in full for the cost of employees off work for up to 14 days.

Sunak also said the government would make it “quicker and easier” for those who are self employed or in the gig economy to access benefits.

To help small businesses combat the cashflow crisis, the Chancellor has also announced a temporary business interruption loan scheme, to let small and medium employers claim for costs arising from the coronavirus outbreak. Additionally, business rates will be abolished for this year for firms with a rateable value below £51,000 in the retail and leisure sectors, saving up to 25,000 pounds to every business.

The total value of these fiscal stimulus measures is £30bn for this year.

The Chancellor said this was a “temporary, timely and targeted” response coordinated with the Bank of England, which had already announced a cut in interest rates to 0.25% from 0.75% this morning.

The bank said that the emergency 0.5% reduction “will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability of finance”.

As part of the package of measures to support UK businesses, the surprise announcement also included a new funding scheme to encourage banks to offer loans to small and medium enterprises in financial difficulty because of the outbreak.

National Health Service

COVID-19 is also taking its toll on the public health service. To support the NHS in the short term, Sunak unveiled a £5bn COVID-19 emergency response fund. 

There will and additional £6bn in new funding to pay for more GP surgery appointments and increase the number of nurses. By 2024, the NHS will receive a cash increase of £34 billion a year compared to 2018-19.

Revision of fiscal rules

The government is forecast to meet the fiscal rules that were included in the costing documents attached to the 2019 election manifesto.

The set of rules, which put limits on government spending, annual borrowing and long term debt, were “to have the current budget in balance no later than the third year of the forecast period; to limit public sector net investment to 3% of GDP; and to reassess plans in the event of a pronounced rise in interest rates taking interest costs above 6% of government revenue.”

The government can support the economy and fund the response to COVID-19 in the short-term and take action over the medium-term to drive growth and improve public services, without compromising fiscal sustainability, according to the Budget 2020 red book.

However the Treasury will be reviewing the fiscal rules over the summer. Any changes will be announced in the autumn Budget 2020.

Budget 2020

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