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The March Budget: coronavirus-related support and major increases in public spending

Date: 16th March 2020

The March Budget: coronavirus-related support and major increases in public spending
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:
    • There were two parts to the Budget. Firstly, a package of measures, costed at £12bn, to support public services (including the NHS), individuals and businesses affected by the coronavirus outbreak. Secondly, the new Government’s overall fiscal strategy, including the spending envelope for the forthcoming Comprehensive Spending Review 2020 (CSR).
    • The OBR’s revised economic forecasts were little changed. GDP growth was revised to 1.1% for 2020 (from 1.4% in March 2019, last year’s Spring Statement), 1.8% for 2021 (1.6%), 1.5% for 2022 (1.6%), 1.3% for 2023 (1.7%) and 1.4% for 2024 (new forecast). Significantly, these forecasts did not allow for the economic impact of the coronavirus outbreak.
    • The OBR revised their public finances forecasts. Public sector net borrowing (PSNB) and public sector net debt (PSND) were revised significantly higher, reflecting the substantial increase in public spending. Cumulative extra borrowing for the years FY2020-FY2023 (inclusive) was £95-100bn, whilst debt was projected to be £99bn higher in FY2023, and some 2.9% higher as a % of GDP, than in March 2019. These forecasts did not allow for the Treasury’s package of coronavirus-related measures.
    • The Budget was very expansionary. The estimated net effect of the spending and tax decisions totalled £17.9bn (FY2020), £36.4bn (FY2021), £38.5bn (FY2022), £41.15bn (FY2023) and £41.9bn (FY2024), entirely driven by higher spending (with current spending increases greater than capital spending increases). The net tax measures were contractionary.
    • Spending announcements included extra cash spending for the NHS, security and schools; around £640bn of gross capital investment for roads, railways, communications, schools, hospitals and power networks across the UK by FY2024; and plans to increase public R&D investment to £22bn a year by FY2024.
    • Tax announcements included confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%; freezing fuel and alcohol duties for FY2020; and increasing the NICs threshold to £9,500 in April 2020.
    Other UK news:
    • The Bank of England announced an emergency cut in Bank Rate to 0.25% on 11 March, alongside a new Term Funding scheme for SMEs and a relaxation of capital buffers.
    • GDP was flat (MOM) in January and flat (QOQ) in the three months to January.
    • The underlying total trade (goods and services, excluding precious metals) balance showed a deficit of just £0.5bn in the three months to January.
    The US Fed cut the target range for the Fed Funds rate to 0%-0.25% on 15 March, along with a major stimulus programme.

    EU update:
    • The ECB agreed a package of monetary policy measures to alleviate the impact of the coronavirus outbreak on 12 March, but no cuts in interest rates.
    • The Commission sent a draft legal text, titled the “New Partnership between the European Union and the United Kingdom”, to the 27 EU states on 12 March.
    Ruth Lea said, “The coronavirus measures are to be welcomed. Concerning the rest of the Budget, it was more expansionary than expected, with large projected increases in current as well as capital spending. The OBR forecast significant rises in public sector borrowing and debt compared with March 2019. But, given the huge uncertainties ahead, there are serious risks that these forecasts could be significantly overshot. There is already speculation that the Autumn Statement may need to contain tax rises, though, at this point, it is too early to comment on this issue with any confidence.”

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Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151