Chancellor Rishi Sunak will have to rethink key parts of the budget next week because of growing fears that the spread of the coronavirus will trigger a global economic downturn, economists, former government ministers and advisers have warned.
Sunak, who was installed as chancellor less than three weeks ago following the resignation of Sajid Javid, was already engaged in a race against time to deliver his first budget on 11 March – the date set by his predecessor.
But with the spread of the virus wreaking havoc on the financial markets and raising fears of an economic downturn that would in turn cut tax revenues to the exchequer, his task has suddenly became far harder, say experts.
Paul Johnson, director of the Institute for Fiscal Studies, said that economic forecasts – drawn up by the Office for Budget Responsibility (OBR) – would need to be presented with a strong health warning.
“Whether the OBR has had time to include the likely impact of the virus into its forecasts or not, the chancellor will need to say how it creates further uncertainty,” he said. Johnson also believes steep stock market falls last week could knock capital gains tax receipts and depress the revenue the government was expecting from stamp duty on share buying. “There is also going to be a hit to growth,” he said.
Writing in today’s Observer, former Treasury minister and Tory MP David Gauke said the budget would have to be recast at a late stage to take into account the unpredictable economic outlook.
“Given the uncertainties, the OBR is likely to qualify its economic forecasts,” Gauke writes. “This does not make the task of the new chancellor, Rishi Sunak, any easier. He will be delivering his budget just four weeks after being appointed, with a powerful No 10 apparently indifferent to keeping control of the public finances, in a government that is pursuing a growth-damaging Brexit policy and in the midst of a health crisis that makes all short-term economic forecasts a matter of guesswork. It is quite a baptism of fire.”
Stewart Wood, who worked on six budgets when serving as an adviser to Gordon Brown, said the timing of last week’s market meltdown created a planning nightmare for the Treasury.
Lord Wood said: “With 10 days to go, the OBR’s forecasts and spending envelope will normally have been locked down by now. The Treasury may have to rip up the plans its budget has been based on and hastily assemble a new plan B, to ensure the chancellor’s statement on 11 March fits the situation we are in, rather than the situation we would have been in before the Corona crash.”
In a newspaper interview Javid said he had been planning an income-tax cut and a network of electric car-charging stations for inclusion in the budget. Sunak will also be under pressure from Downing Street to deliver on the Tories’ post-election promises to “level up” the country.
Local government leaders and charities are also calling on the Treasury to provide urgent funding for adult social care services across England. According to Age UK, between 2010 to 2019 spending on adult social care services fell by £86m in real terms, representing a 4% cut in local authority spending. Age UK estimates that hospitals delaying discharges of elderly people, due to a lack of social care, cost the NHS £500 every minute.
Rachel Reeves, the Labour chair of the all-party business, energy and industrial strategy select committee, said Sunak should deliver a bold budget amid the uncertainty. She said: “The coronavirus, flooding, Brexit and warnings about a big hit to economic growth have put businesses and households under huge pressure. But now is not the moment for a safety-first budget.
“The chancellor must not use this uncertainty as an excuse to further delay the investment that the north and our public services so badly need. The country would never forgive a chancellor who sits on his hands when we are facing a national emergency.”
