No Rishi snooze thanks to labour market worries
Chancellor Rishi Sunak appeared in front of the Treasury Committee last week (11) as part of the committee’s inquiry into the UK Budget 2021. Dan York-Smith, Director of Strategy, Planning and Budget at the Treasury – the official with overall responsibility for the Budget - appeared alongside Sunak.
On the impact of coronavirus on the economy, Sunak informed committee chair Mel Stride, Conservative, of the OBR’s analysis and its assumption of an economic scarring (long-lasting damage), because of the impact of coronavirus, of three per cent over the medium term. Sunak said that what happens to the labour market keeps him up at night now.
Sunak said his investing career tells him not to have that high a level of confidence in macroeconomic forecasting with regards to what global bond investors will price credit at ‘but the point one would make is that they are exceptionally low’.
He went on to say because of our robust independent framework, inflation expectations in the UK remain ‘well anchored’. Stride asked how the Chancellor will attempt to deal with inflationary pressures. Sunak said that is down to the Bank of England.
Spending forecasts and risks
Stride is worried that there is no explicit provision for coronavirus spending on annual vaccinations beyond the current programme and test and trace, as well as tackling the backlog in hospital operations, nurses pay round, education to help pupils catch up on their learning, possibly needing to bail our rail industry and universal credit £20 uplift. Sunak’s response is that over the first two years, this current year and next year, there is about a £70 billion increase in public spending across resource departmental expenditure limits (RDELs) and capital departmental expenditure limits (CDELs), across all discretionary expenditure for departments. Stride responded that there is a £15 billion cut relative to previous plans for 2022-23 in the face of all the additional spending pressures the Government are likely to face.
Conservative Felicity Buchan asked about OBR’s forecast of three per cent scarring. Sunak said it is an uncertain number, highlighting that the Bank of England says 1.75 per cent whereas the IMF has a range that is potentially up to five or six per cent. The industries that are most affected by a downturn caused by COVID-19 are not capital-intensive (unlike the 1980s), rather it is hospitality that is hit where it is probably much easier for people to adjust and move professions, he said. Those are arguments for why the scarring might be lower, he said. The way to reduce scarring is to keep that unemployment number low and limit the amount of business insolvencies. We must try to hold as much of the economy’s productive capacity together as we can through the crisis, he added.
Buchan then asked about the corporation tax ‘super-deduction’, saying if we accelerate the investment to now, especially with higher corporation taxes, in two years’ time there may be a very difficult period if so much of the business investment has been accelerated. Sunak said the growth is slightly more valuable to us now when the economy really needs to close an output gap than it is in two years’ time. We need to drive an investment-led recovery, he said. He went on to say on the investment side, we have perennially had a difficult time raising capital investment. We know there is excess capital sitting in corporate bank balances as well, and we want to unlock some of that and use it to help drive the recovery, which is why the super-deduction and other incentives are so helpful. It needs to be long enough that people have the time they need to make the plans and do investments of that nature but not so long that it loses the impact you want, he added. Compared to the last time we did a widely available first-year allowance, in 2009, said Dan York-Smith, the super-deduction is five times more generous at its peak and 10 times more generous in total.
Conservative Anthony Browne asked why Sunak is relying more on tax rises than spending cuts now in contrast to the way it dealt with the recession caused by the financial crisis. Sunak replied that if there are demands on the spending side that are larger, it is reasonable to expect that those must be paid for.
Sunak said that now is not the right time to have new fiscal rules that the OBR can score you against. When will it be? asked Browne. Sunak said the appropriate time will be when we have a bit more certainty about the medium-term outlook. That might be towards the end of this year, he added.
Was there a particular reason for thinking about stimulating business rather than stimulating consumption? asked Browne. Sunak said we probably now have higher confidence that there will be a consumption-led recovery but investment has really suffered. Dan York-Smith added that if you were to take the super-deduction away, you would have a very strong consumption recovery but not a very strong investment recovery.
Balancing the books
Browne opined that we cannot rely on growth as much now as we could after the Second World War, so it is going to be traditional fiscal measures of tax rises and spending cuts that are going to have to do the heavy lifting in terms of balancing the books.
Sunak said it is a bit early to speculate if there is room for fiscal relaxation towards the end of this period or in future Budgets.
Dame Angela Eagle (Labour) wondered why Sunak has budgeted to spend less on public services post 2022 than he had planned pre-pandemic. Sunak replied that it is only a planning assumption.
She remarked that the response from NHS staff to the pay offer they have had demonstrates what they think of it [meaning it is unpopular], even though Sunak thinks it is fair and reasonable.
Eagle complained that a lot of public money is being spent and you have excoriating reports from the National Audit Office (such as on the efficacy of the spend on track and trace and PPE), but nothing seems to be being done to get a grip of it. Sunak said there are lessons to learn but it is also important to remember the context the government was operating in at the time.
Sunak told SNP’s Alison Thewliss that, longer term, it is appropriate that we help people find opportunities, if the current job they are in is one that is not likely to survive.
Thewliss asked why it took so long to establish the Taxpayer Protection Taskforce announced in the Budget, with £100 million and 1,265 HMRC staff to combat fraud. Sunak replied that there are regular fraud checks going on all the time. York-Smith said we now have much more data. He said the Treasury expects to get back £1 billion a year by the end of the forecast. It is over £2 billion over the three years between 2023-24 and 2025-26, he said. Thewliss commented that it is a bit of a shame that the government are [only] now putting money into HMRC when people have been saying for a very long time that if you invest in HMRC staff you will get money back.
Omissions from coronavirus economic support
Sunak said, unfortunately, the directors’ income support scheme (DISS) proposed by the FSB and others is not one that can be implemented without leaving the taxpayer exposed to an enormous amount of fraud risk. He said: “I appreciate that some people will feel that they have not quite got the help they would want in the way they would want it, but there are other things out there that hopefully will help.” Sunak said the fraud and error rate for DISS would have been higher than the first SEISS grant (the range for SEISS is between one per cent and two per cent). York-Smith recalled of the people receiving dividend income, the government estimated that only around a quarter of them would be classified as directors. There is the potential that three-quarters of the recipients of help through something targeting dividends would not actually be directors. It is not fraud, but it just shows you the difficulty in targeting, he said. Sunak added that no one actually knows how many company owner-managers there are in the UK, because there is no objective verifiable definition of what that means.
Still on SEISS, why is it that those who have now submitted their 2019-20 self-assessments cannot get that retrospectively? asked Thewliss. Sunak replied that he does not think it would be right. If you are going to retrospectively do it for them, why not others as well? he said. He added: “If you retrospectively opened up however many million people’s tax returns and SEISS grants to recalculate them all, that would not be the sensible and appropriate thing to do. It would mean that lots of people would have less money than they were given, and you would have to get all of that back. That would not be appropriate.”
Conservative Harriett Baldwin wondered whether the Treasury considered producing an equalities impact assessment this time, with a focus on gender, age and ethnic minority status. On women, York-Smith said it is not a question of it not being technically possible; it is just that it would not meaningfully add to people’s understanding of the impacts in the way that the income-decile analysis does, which is now well established.
Sunak pleased Conservative Julie Marson when he said the Treasury will tell councils that they will not get the top-up – the £400 million-plus of discretionary funding – until they have spent the money they already have to encourage them to get that out of the door and to businesses.
Corporation tax rise
On the corporation tax rise, Sunak said he wanted to make sure the UK still had an internationally competitive rate and that this was still a ‘pro-business place’, and the government also wanted to make sure that the timing of the rate increase was one that would [not hinder] recovery in the short term. Businesses told the Treasury very clearly that what they wanted was certainty. It is only those businesses that are doing well that pay it. And ‘we think it was easier to do it in one go, but we do have the very generous super-deduction between now and then’, he explained. Marson said corporation tax is ‘our shop window to the world’ and worries a rise is a disincentive to direct investment from abroad. Sunak replied that corporation tax is ‘not the whole shop window’ and we are the lowest in the G7, but the US is forecast to go much higher. Companies are looking at things like skills levels and infrastructure.
Sunak added that ‘we have a manifesto commitment not to raise the rates of VAT, income tax or national insurance. I wanted to honour those commitments. That is why we have looked elsewhere’.
Sunak told Marson that the types of businesses that will benefit from the super-deduction will predominantly be those that invest in capital equipment. Since the early 1990s, we rank lower than our European competitors, Australia, Canada and America when it comes to capital investment as a percentage of GDP. Capital investment is good, because it drives up productivity, creates jobs and spurs innovation, he argued.
Sunak said the Treasury is looking at widening the definition of R&D.
Housing and SDLT
A fired-up Siobhain McDonagh, Labour, was critical that housing was not covered much if at all in the Budget. She said there are 1.15 million families on social housing waiting lists. There are 120,240 children living in temporary accommodation. Nine per cent of the social rented sector is classed as overcrowded, with the Health Foundation concluding that overcrowded housing may have contributed to increased deaths during the pandemic.
McDonagh said that one in 10 adults in this country owns a second home, while four in 10 do not own their first. How does the stamp duty holiday help to address that balance? Sunak replied that second-home buyers pay a three per cent surcharge when they buy a home, and that remains during the current stamp duty holiday. On the new mortgage guarantee, Sunak claimed that when a government last implemented something similar after the last crisis, that 80 per cent of the beneficiaries of that mortgage guarantee were first-time buyers. McDonagh came back and said ‘prior to the stamp duty holiday, the banks were lending 95 per cent mortgages, which disappeared after the introduction of the holiday, so, really, Chancellor, you are stepping in to bail out the banks rather than first-time buyers’.
Rushanara Ali (Labour) criticised the cut to the international development budget, but Sunak claimed the UK will remain the second most generous G7 economy as a percentage of GDP. The UK will be significantly ahead of the 0.38 per cent or 0.36 per cent OECD average spend, and will remain the largest donor to international bodies.
Sunak said creating a high-quality carbon-offset market in the UK will help get funding into developing countries to help them tackle the challenges of climate change.
The Chancellor told Conservative Steve Baker that he is committed to maintaining the Bank of England’s independence in pursuing price stability. Sunak went on to say Baker is right to highlight the sensitivity of our fiscal situation to changes in inflation and interest rates.
The full session is here.
By Hamant Verma