Article written by Michael Collins – Director of Government Affairs – Prudential – Received 03/07/2020
Who’s in charge of the Treasury, Rishi or Tina?
Margaret Thatcher had an acronym that she employed during her premiership: TINA – There Is No Alternative. For Thatcher this was used to face down opposition (including within her own Cabinet) for a programme of labour market reform, financial market deregulation, and privatisation. Even if he didn’t use the phrase explicitly TINA must have been in Rishi Sunak’s mind as he unleashed a set of public spending commitments in late March that has not been seen outside of wartime.
The scale of the public health threat and the economic hibernation the Government imposed to deal with it meant that there probably was ‘no alternative’ to the furlough scheme, to CBILS, or to unlimited Bank of England liquidity. That governments across the G20 largely ended up doing something broadly similar adds to the feeling that such measures were inevitable.
Forced by Government edict to shut down almost overnight businesses demanded support to tide them over; unable to go to work because of the public health requirement to ‘stay home’ households expected their incomes protected. But while the Treasury and HMRC performed a Herculean task in getting this set of assistance schemes up and running so quickly, they wereactually politically straightforward. It’s only now that the political heavy-lifting begins.
Because, contrary to the Iron Lady’s maxim, there now is an alternative. In fact there are now many alternatives open to the Government as it ponders the right balance of tax, spending and debt for an economy that is moving, tentatively, out of this enforced hibernation.
Sunak has some big decisions to make, whether in the Summer Economic Update he will provide on 8 July or later in the year.
Public finances
Perhaps the biggest relate to the public finances: what level of public debt is he comfortable running with? And over what timescale does he want to get there?
The Prime Minister promised in his ‘Build, Build, Build’ speech – consistent with his December 2019 election pledge to voters in the Red Wall seats – that there will be “no return to austerity”, but that bird has already flown the nest anyway. Three months of lockdown and the support measures that were put in place have deprived the Exchequer of significant revenue and massively increased spending, putting the country on track for debt-to-GDP ratio north of 100%[1]. And as the economy worsens these twin pressures will increase, as a recession brings lower tax receipts (less corporation tax or VAT, for example) and higher spending (a bigger welfare bill as more people become unemployed), what are often referred to as the ‘automatic stabilisers’.
While it would be hard to describe a situation in which spending has increased by 50% (as happened in April)[2] and the deficit is potentially hitting 15%[3] as ‘austerity’ it’s what Sunak does next that will settle in the mind of most voters whether the Government has genuinely left this theme (which has almost become a term of abuse in British politics) behind.
There was criticism of George Osborne that he applied the brakes to public spending too rapidly and too indiscriminately from mid-2010, hampering the recovery from the global financial crisis by taking demand out of the economy and hitting programmes that most benefited the poorest.
In the short-term TINA is going to stay in charge as the Government will continue to borrow heavily out of simple necessity
[1] https://obr.uk/docs/May-2020-PSF-Commentary.pdf
[2] https://obr.uk/docs/May-2020-PSF-Commentary.pdf
[3] https://www.ey.com/en_uk/news/2020/05/uk-public-finances-in-deficit-by-record-62-billion-in-april
Higher borrowing
But there’s also a good chance that Sunak will consciously choose a policy path that means higher borrowing, seeing it as a lesser evil than an extended recession that brings with it permanent damage.
The combination of, inter alia, ultra-low interest rates (which makes debt servicing comparatively cheap) and the big increases in public debt across the major developed economies (which means the UK doesn’t look like an outlier) provide the Chancellor with this room to choose.
It provides him with the chance to use his tax and spend powers in a way that focuses on boosting short term growth. With millions of jobs now at risk Sunak is likely to make the calculation (which is both political and economic in nature) that a few more percentage points on the debt-to-GDP ratio will now make little difference to the bond markets (‘in for a penny, in for a hundred billion pounds’, you might say) but could, if he selects the right measures at the right time, make a big difference to the scale and duration of the recession (and thus to the Government’s popularity).
The ideas for possible measures are now pouring in from think-tanks and lobby groups and include such perennial suggestions as a temporary VAT cut and a big boost in infrastructure spending. But even these seemingly self-evident solutions involve tricky choices, not least around timing.
Do you offer an across-the-board cut in VAT rates? Or target it on certain goods and services? If so, which ones? What’s the right time to do it? Do it too early, when consumers are still wary about their physical and economic health, and it fails to have an impact. Do it too late and too many retailers or restaurants have already gone bust.
Increased spending on infrastructure is always a popular idea to boost demand and to get people back to work, but here too there are politically difficult decisions to make. Those infrastructure projects that might be of most strategic importance to the nation aren’t necessarily the ones that are popular in politically important marginal constituencies (HS2 or Heathrow expansion) or that are ‘shovel ready’ and will actually get people back to work quickly. (A favourite example of this is Crossrail – first proposed by the Government when Margaret Thatcher was Prime Minister!).
The risk in crisis times is that marginal projects that have been gathering dust in the files of central government department or local authorities (for good reason) suddenly emerge with a flourish, seeing this as their moment to get financed. Ministers have some difficult choices to make in the coming months between (quite possibly sub-optimal) projects.
Longer term
But at some point the Chancellor’s attention will inevitably have to come back to the longer term state of the public finances, not least because his party – in the country and in Parliament – still contains plenty of deficit ‘hawks’ who will feel instinctively uncomfortable about a seemingly unrelenting rise in debt.
This is where TINA’s influence seems weakest, given that the Government has the freedom to play about with any and every aspect of its tax system and each and every pound of public spending.
In practice though I suspect that even here Sunak will rapidly feel the constraints on his freedom of action. The Conservative election manifesto, for example, promised not to raise the rate of income tax, VAT, or National Insurance and to keep the ‘triple lock’ on state pensions; the ‘levelling up’ agenda needs to be seen to be delivered through big investment in the Midlands and the North; and it seems inconceivable that there won’t have to be significant additional investment in public health, the NHS and social care as the lessons of coronavirus become apparent.
And around the time that some of these choices have to be made the UK will leave behind the transition arrangements with the EU on a yet-to-be-defined basis, which may generate its own essential tax and spend policies (would you, for example, want to be raising corporation tax just at the point you’re looking to promote the message that ‘Global Britain in open for business’?)
Summary
At this point it’s impossible to predict the tax and spend decisions that the Chancellor will make. Much will depend still on the trajectory of the coronavirus itself and whether there needs to be a second lockdown (either nationally or city-by-city), on how quickly consumers demonstrate that they are comfortable with returning to pre-pandemic spending and consumption patterns, and on the nature of the UK-EU relationship that is in place from 1 January 2021. All of these are, at this point, ‘known unknowns’ but will be critical context for the decisions the Chancellor has to make over the coming months (and possibly as early as the next couple of months).
And he does have decisions to make. While some issues (perhaps many issues if you were Margaret Thatcher) are in the hands of TINA, most often it’s another political maxim that ends up on Ministers’ minds: ‘to govern is to choose’. And it’s not easy.
Politically these are challenging times which have obviously been affected by the ongoing Coronavirus Pandemic. It will be interesting to see how the rest of the year pans out.
Please continue to check for our regular blog posts and updates.
Charlotte Ennis
03/07/2020
Source: Refinitiv Datastream June 2020