Rishi Sunak will use this week’s Budget to shore up the UK’s fragile public finances, while focusing remaining resources on the NHS, the “levelling up” agenda, skills and helping hard-pressed families.
The chancellor is expected to be given a short-term Budget windfall by the Office for Budget Responsibility, which is set to upgrade its forecasts to show stronger growth in 2021 and 2022.
Sunak will use some of this fiscal boost to pay for key government priorities — including helping families through a cost-of-living crunch this winter — but he will also bank some of it as insurance against future economic shocks.
The chancellor admitted on Sunday that Britain’s public finances were more exposed to changes in interest rates than most other advanced economies, while the Covid crisis remains a threat to the economy.
“It’s part of what having a strong economy means: having that protection and resilience to future shocks that might come our way,” he told Times Radio.
Sunak said a 1 percentage point rise in both inflation and interest rates could cost the exchequer £25bn a year, largely owing to the cost of servicing short term public debt now standing at almost 100 per cent of national income.
The chancellor is hoping to put debt back on a downward path later in the parliament and balance the current budget, excluding capital projects, with more headroom than at the time of the March Budget when OBR forecasts showed little room for error.
The fiscal watchdog’s improved forecast for a recovery in 2021 and 2022 follows the better than expected economic performance of recent months.
Crucial to public finances will be the fiscal watchdog’s likely decision to scale back its estimate of the persistent scars from coronavirus in its latest forecasts.
This would take permanent economic damage down from 3 per cent of the size of the UK economy to closer to 2 per cent, according to the Resolution Foundation, allowing a more optimistic medium term outlook and Sunak room for manoeuvre given his ambition to balance the current budget.
Previous chancellors, both Labour and Conservative, have built in margins of close to 0.7 per cent of gross domestic product. This would mean about £15bn in terms of the leeway that Sunak would seek to build into the public finances to meet his own fiscal objectives.
In the run-up to next week’s Budget, the Treasury has announced how Sunak intends to carve up public spending over the next three years — setting out the government’s priorities for the rest of the parliament.
Sunak has allocated £7bn for public transport in larger cities, £3bn to help pay for a “skills revolution”, £850m for galleries and other cultural centres and £700m to improve sports and youth clubs.
The waiting list crisis in the NHS remains an overarching concern. Sunak will allocate £6bn over the next three years to tackle NHS treatment backlogs in England.
The spending review, which runs alongside the Budget, will set out priorities for NHS capital investment, aimed at delivering 30 per cent more elective activity by 2024-5 compared with pre-pandemic levels.
The programme will accelerate checks, tests and scans, with £2.3bn to improve diagnostic services. The Treasury said this was “new” money, in addition to £12bn a year for day-to-day health and social care through the recently-announced increase in national insurance rates.
Layla McCay, director of policy at the NHS Confederation, which represents health organisations, said the Treasury “will know that the NHS’s allocation in the spending review falls short of what is needed to get services completely back on track. While being grateful for the investment, we should not pretend that this is not the case.”
Sunak’s Budget will also deliver cash for the government’s levelling up agenda, including £150m of funding for regional “angel investors” to help small businesses outside London access early funding.
The Tees Valley Combined Authority, run by Tory mayor Ben Houchen, has secured the first loan from the government’s new UK Infrastructure Bank for a flagship freeport on the River Tees.
The state-owned bank will loan £107m for the South Bank Quay project — on the site of an old steelworks — providing facilities for servicing the offshore wind sector, manufacturing and storage.
Additional reporting on Sarah Neville in London