The chancellor’s substantial giveaways may still not be sufficient to combat the economic impact of the coronavirusby Vicky Pryce / March 11, 2020 / Leave a comment
This was very much an emergency budget—aimed to inspire confidence in the government’s ability to deal with the coronavirus. It also promised a bright new future of (a lot) more spending on infrastructure and extra support for innovation and growth, mostly financed by borrowing.
But the short-term economic and fiscal position is the one most at risk. The health situation has necessitated extra spending and as Chancellor Rishi Sunak emphasised, this budget’s focus was “safety and economic stability.” But is what he put aside—an extra £30bn for dealing with the crisis—enough to counter what is inevitably going to be a period of very slow growth in the economy? And will he really be able to fund future years while keeping within his predecessor’s fiscal rule of balancing the current budget in two-to-three years’ time?
The omens are not good. Survey data at the turn of the year showing an improvement in optimism and a pickup in house prices suggested good growth in Q1. But the data for January out today suggested stagnation rather than growth in the month. And flooding and anxiety over the coronavirus will have affected February and March. So the prospect of contraction this quarter and again in Q2, in other words a technical recession, now appears a real possibility.
In this context, the Office for Budget Responsibility (OBR) forecast drawn before the outbreak took hold, expecting growth of 1.1 per cent this year, now appears very optimistic. In truth, a lot of the output that will be lost in the short term if the virus spreads as expected will never be recovered—particularly on services. And for manufacturing to really pick up one needs strong growth in the world economy again, which may take some time to materialise. So even if there is a bounceback later, zero growth for this year seems the most likely outcome.
Yes, the chancellor will spend a lot of extra money on the NHS. And he has made clear it will be as much as is necessary—in other words, even more if needed. And yes, he has given lots of support to firms, particularly to SMEs, with large business rates relief and other measures which will be running through the year and should be helpful. And for individuals and businesses the extra coordinated…