The Financial Health of the Nation
Henry Thompson, Head of Public Affairs at the IFoA, reviews the key announcements in the 2021 Budget of relevance to the IFoA and its members.
Budgets are a tricky political set piece for any Chancellor, even in times of relative calm. The inhabitant of No. 11 has the unenviable task of having to balance the views of those within Government and their party, as well as any commitments made in their manifesto, with the demands of public services, businesses (large and small) and other stakeholders across society – not to mention the electorate. When you throw the disruption created by a global pandemic into the mix, at a time when the UK continues to find its feet in the aftermath of Brexit, it’s an understatement to say that the task becomes a touch trickier.
Unsurprisingly, thewas highly anticipated given the last 12 months and will have been seen within Government as an important milestone in its wider post-Covid strategy. Reinforced by promising reductions in both cases and hospital admissions, last week felt like a change in the political winds, with focus now veering from the health of the nation to the health of the nation’s finances, thanks to the success of the vaccination programme.
Pre-Budget speculation gave rise to inevitable debate about the best course to chart to achieve a balanced recovery. On one side were voices calling for Government to raise taxes to reduce the eye-watering deficits racked up by the job retention and various business support schemes. On the contrary, there were calls for the Chancellor to spend his way out of the crisis. Recent research from Lane, Clark and Peacock on the number of ‘’ created by the pandemic supports this logic. But it also demonstrates an emerging new schism within British political discourse that will likely dominate debate and policy for years to come: how to balance the needs of those who have had their personal finances shattered by the crisis against those who have seen their financial resilience cemented. No immediate silver bullet exists.
Whichever way you look at it, and whichever letter of the alphabet you envisage the shape of the economic recovery will follow, the choices in front of Rishi Sunak were stark and limited.
The Office for Budget Responsibility (OBR) forecasts that the UK economy will still be 3% smaller in five years' time because of the pandemic. £355bn has been borrowed by the Government this year and £210 billion has been earmarked next year to support the ongoing response to the pandemic; borrowing figures that dwarf others at any point during peacetime. According to the Institute for Fiscal Studies, if we follow the OBR’s downside scenario then even with policies delivered, borrowing would still be at £130bn in 2025-26: a current budget deficit of almost £60 billion.
As for the Budget itself, a number of the major announcements were pre-briefed in the weekend papers: an extension to the stamp duty holiday; a new 5% mortgage guarantee; a six-month extension of the £20 per week Universal Credit uplift, to name but a few. The customary ‘rabbit out of the hat’ was the ‘super deduction’, allowing businesses to claim 130% of their new machinery cost as a tax cut.
Despite the rocketing national debt, Mr Sunak showed little desire to restrain public spending just yet. The furlough scheme will continue to run until September and an extra £1.65 billion cash injection will ensure the Covid-19 vaccination roll-out continues at pace. A further £28 million is to be spent on increasing the UK’s capacity for vaccine testing, support for clinical trials and to improve the UK’s ability to rapidly acquire samples of new variants of Covid-19.
Prior to the Budget, the IFoA coordinated a, Founder of the Big Issue, urging the Chancellor to not place an unfair and unmanageable burden on younger and future generations when designing his economic recovery package. For too long, we’ve seen younger and tomorrow’s generations shoulder the financial impacts of the past and so we’re grateful for the wide support the letter received by other co-signatories. It was particuarly reassuring to see intergenerational fairness feature in a lot of the pre and post-Budget commentary.
Disappointingly, social care was not mentioned once, despite the impact the pandemic has had on care homes across the UK. In our, the IFoA called for urgent action to find a sustainable, long-term settlement on care funding. Yet again it appears the question of care funding will remain nestled in even longer grass for the foreseeable future.
On the infrastructure side, the new Leeds-based UK Infrastructure Bank will boost investment to accelerate progress to net zero, whilst the new £4.8bn Levelling Up Fund is designed to support local areas invest in infrastructure that improves everyday life.
Staying with sustainability, the IFoA welcomes plans for the £15 billion of green gilt issuance in the coming financial year, to help finance critical projects to tackle climate change and create green jobs across the UK. The Bank of England’s monetary policy remit was also updated to reflect the importance of environmental sustainability and transition to Net Zero; something the IFoA emphasised in its recent. However, question marks remain over the wider consistency of the UK’s stance on sustainability, with the now eleventh year in a row freeze on fuel duties. From a policy perspective, this anomaly doesn’t stack up just 8 months out from COP26.
For savers, the freeze in the lifetime allowance means the goalposts have been moved yet again, making it even more difficult for (and in some cases will penalise) those looking to make long term plans for their retirement.
Whilst the economic health of the UK is far from certain or encouraging, there are promising signs that normality is within touching distance. Big questions remain around when, how or even if it will be possible to return to the nation’s financial resilience of the past. Some important decisions were taken last Wednesday, but these really are the first steps on the road to recovery.