Budget update amid a blizzard of uncertainty across the UK

This Budget could make or break Rishi Sunak’s reputation as borrowing in the year of Covid looks set to be over £450bn.

Budget update amid a blizzard of uncertainty across the UK Getty Images

In just over two weeks’ time, the Chancellor Rishi Sunak will deliver the Budget. 

The event updates the country on the state of the economy and sets tax rates for the year ahead. 

More strategic decisions normally give a clear indication of the long-term economic thinking of the Government. 

The Ides of March was a time for the Romans to settle debts but Sunak’s March 3 brush with hard realities will, in part, be an exercise in releasing numbers, which for most voters will be beyond any rational comprehension. 

Borrowing in the year of Covid looks set to be over £450bn. The deficit is likely to be over 21% of gross domestic product (GDP). National debt racked up by successive governments will be well over £2tln.

To compound the grief, the UK economy shrank by 10% last year, more than double the contraction of the world economy at 4.3%. The UK figures only beaten by the contraction of 1709 in the year of the Great Frost. 

There is now a hard-core of MPs on the Government benches who want an end to lockdown. They point to these figures as evidence that a public health policy is choking the British economy and leading it to ruin. 

Even the measured Treasury Select Committee says the Government must spell out the consequences of lockdown by demonstrating the economic upside of lifting restrictions and detailing what such measures might mean for infections and Covid deaths.

But the Government won’t go there and will hold to the line of last autumn that “it is not possible to forecast the precise economic impact of a specific change to specific restrictions with confidence”. 

Of course, it is the rollout of the vaccination programme that is fuelling the calls for a quicker easing of restrictions. Governments in all parts of the UK know, however, that they would never be forgiven if there was to be a fourth national lockdown because of misjudgements made now or in the coming weeks. 

That does nothing to soothe, quite the opposite. Business, in particular, has had enough of the in-out-back in policy, which has made financial planning a redundant exercise and which has only further shredded nerves. 

The aforementioned figures on the ‘big picture’ economy allied to a harder line from the UK Government on lockdown set the backdrop to the Budget. What makes this Budget so difficult is that the vaccine has brought clarity but not certainty. 

Even the figures Sunak will give on growth and borrowing will in all probability be skewed by events as they unfold. Forecasting, never an exact science at the best of times, is now a stab in the dark. He has a number of questions to address. Will he extend furlough yet again? 

Circumstances have forced U-turn after U-turn on that and it may be he will have to announce yet another extension. He is also under enormous pressure to extend the £20 per week uplift in Universal Credit – if the thrust of the argument is that we are still in a difficult place it would seem perverse to scrap this policy. 

The Treasury clearly believes the longer it runs, the more politically damaging would be its eventual withdrawal. It looks like he has three objectives: support the economy until lockdown is materially lifted, lay some initiatives for the coming years, and indicate how he might start to address the scale of the deficit in the medium to longer term. 

Tax hikes on ordinary families are a non-starter. Taking money out of the economy when business needs a boost is imperative this year and next. He will also hope that the estimated £125bn households have accumulated during lockdown will be spent when life gets back to something approaching normal. 

The Bank of England, however, thinks only about 5% of that will be spent as the ruin that lockdown has visited on some affects the save and spend mentality of other, more fortunate citizens. So what taxes could go up? Corporation Tax looks an obvious bet as it is low by international standards. 

Fuel Duty, that perennial pre Budget talking point, might also increase. National Insurance hikes for the self-employed have been mooted. Capital Gains Tax increases were on the Treasury radar pre-Covid. There has even been talk of a one-off Wealth Tax but that would be an ideological piece of humble pie no Conservative Chancellor I suspect will want to choke on. In short, the Chancellor’s room for manoeuvre is limited. 

The significance of the Budget will be the signals it sends for future tax years and, in particular, the steer it will give on when the real pain will start when recovery is under way. 

Knocking a substantial amount off those borrowing figures and remaining true to the last Conservative manifesto is an exercise beyond a financial Houdini. The Ides of March also marked of course the assassination of Julius Caesar. This Budget could make or break Sunak’s reputation and future ambitions. 

Already the more ideologically robust Tories are sharpening the knives, fearing he is forever lost to a high spending, big State agenda; the kind that would not look out of place in a country run by Keir Starmer.