In the process, he announced a massive increase in capital spending, coming close to Labour party plans during the election. With the economic impact of coronavirus impossible to forecast, and borrowing set to increase this year, we don’t know how the fiscal stimulus will be paid for in the long term, and will have to wait until the autumn budget and the five-year spending review to find out the full impact on public finances. With little mention of Brexit, we will also have to wait for the big decisions about what the business environment will look like when the UK self-isolates from the EU in nine months’ time.
Above all, this was a budget to respond to the impending economic shock of coronavirus.
Today saw a double-barrelled response, with a monetary bombardment from the Bank of England and a fiscal barrage from the chancellor. The measures on coronavirus are designed to manage the cashflow impact for businesses and individuals, as demand, supply, and production is disrupted.
The focus will now also turn to implementation of these measures. My experience of working on government support for small business and bank lending during the 2008 financial crash is that while today’s announcements may look good, the key question will be how quickly these can be implemented and feed through to the economy. Effective implementation will be critical and it is encouraging that the measures are largely based on existing schemes with existing delivery mechanisms.
The chancellor announced huge increases in capital spending: £175 billion additional spend over five years. This is closer to the Labour party’s election proposals (around £220 billion) than it is the Conservative manifesto (around £40 billion). This is the main area, aside from coronavirus, where the chancellor went way beyond what was promised in the December election.
As well as a huge increase in research funding, including a new agency for blue skies R&D, this includes £27 billion on roads and motorways and £2.5 billion on pothole repairs – shovel-ready projects that can get money into the economy fast. For the longer-term infrastructure investment, the big question remains whether the supply side in the construction industry can respond to the accelerated spend. There were also some contradictions on the de-carbonisation agenda, with significant road building and fuel-duty freezes alongside investment in rapid charging points for electrical vehicles and the national rail infrastructure. How these investments and incentives are phased to deliver the long-term target of net carbon zero by 2050 will be crucial.
The budget confirmed the rise in the threshold for employee National Insurance Contributions.
The widely anticipated abolition of Entrepreneurs’ Relief was watered down to a more limited reform, taking the lifetime limit back down to the £1-million level of ten years ago (from £10 million today). This change comes into force with immediate effect. Most investors and owners have been anticipating this since the election and will be relieved that, for now, there were no other new taxes on assets and wealth.
Reforms to pension relief, designed to specifically help with NHS shortages of doctors and other clinical staff, will help all higher earners.
For larger employers and businesses, there was very little change in the budget. As set out in the election, corporation tax stays at 19% and the R&D expenditure credit rate increases by 1%. IR35 and the Digital Services Tax were both confirmed as going ahead in April.
HMRC will invest in a new programme of action to tackle tax avoidance, evasion and non-compliance. From April 2021, large businesses will be required to notify HMRC when they take a tax position that HMRC is likely to challenge.
The Office for Budget Responsibility has forecast GDP growth of 1.4% this year (with the infrastructure spend boosting an otherwise downward trend compared to previous forecasts). However, this will be out of date within days as the impact of coronavirus is impossible to model at this stage.
The chancellor tackled the immediate task in hand – a comprehensive package for dealing with the economic shock of coronavirus (at least for smaller firms) and progress on some of the main election-manifesto commitments made in December, including a big investment in infrastructure and research. This provides business with some short-term assurance.
Big uncertainties remain about the full impact of coronavirus and how this affects longer-term tax and spending decisions. As we head towards the end of the Brexit transition period, there will also be increasing concerns about businesses’ ability to get ready for all the changes required for trading with the EU on 1 January.