Next Wednesday’s budget, the first outing for Chancellor of the Exchequer Rishi Sunak, is likely to focus mainly on Conservative campaign promises and shoring the economy against coronavirus, according to reports from analysts.
“Despite the upheavals of the 2019 general election and 2020 government reshuffles, we continue to expect fiscal policy to remain moderately accommodative”, said Barclays, adding that the key takeaway from the Budget is expected to be revenue-raising measures that look to benefit the UK’s more deprived regions in the North and weigh more heavily on the affluent areas in London and the South-East.
“Large investment spending, by far the largest expected policy announcement in this Budget, is likely to be back loaded and deployed in stages as EU funding dries up, as a consequence of the UK’s withdrawal from the EU”, the bank said.
Barclays also said they expected the chancellor’s efforts to ‘level up’ the economy to cause deficits, “largely structural”, which could “grind from 2.1% of [gross domestic product] in 2019/20 to just shy of 3% in three years”.
Meanwhile, the bank said the coronavirus remained a “serious risk” but barring a major outbreak on UK soil they said it was possible that the impact on the economy “will be limited”.
“Fiscal policy would likely be the key weapon to fight the effects of a widespread outbreak. Depending on the circumstances, we see the UK government deploying a wide range of policy measures ranging from allowing automatic stabilisers to play out in full, supporting businesses hit by value chain disruptions/demand fall out or deploying health and safety measures to increase direct health infrastructure spending if containment measures and tests/treatments need be deployed on a large scale”, Barclays said.
Analyst predicts investment spending, business rate cuts
Research consultancy Capital Economics (CE) echoed expectations that the budget will target areas of the economy most at risk from coronavirus, however, they also expected Sunak to “get things rolling on delivering the government’s election manifesto by raising investment spending”.
“We expect the budget to unveil a fiscal loosening of around £14.5bn (0.7% of GDP) in 2020/21, on top of the £13.4bn of spending announced in the 2019 Spending Round. Most of this will consist of additional investment spending. But a package of measures, perhaps worth £5bn (0.2% of GDP) to help cushion any damage from the coronavirus also seems likely”, they said.
“As this would be tilted towards investment, it has the potential to be particularly effective at boosting GDP growth, adding just over [1 percentage point] to GDP growth in 2020/21. This is the main reason why we anticipate GDP growth will accelerate by more than most expect, from 0.7% in 2020 to 2.0% in 2021”, they added.
More specifically, CE said they expected the chancellor to announce higher spending fo0r the National Health Service (NHS) and other public services to soften the blow of the coronavirus, as well as policies to provide loans and subsidies to companies that see their businesses affected.
“There has to be a good chance that the Chancellor announces a temporary cut to business rates too, as well as help for the self-employed and employees with flexible or zero-hours contracts”, they said.
Fuel duty thaw
One policy that has already found its way out of Number 11 is that Sunak will announce an end to a freeze on fuel duty as part of government efforts to tackle climate change and accelerate the transition towards electric vehicles before petrol and diesel cars are banned in 2035.
However, the plan is likely to encounter opposition from some Conservative MPs who have previously resisted ending the policy to protect motorist’s wallets.