Spring Budget 2020: Background briefing

A Budget was planned for autumn 2019, but it was delayed by the 2019 General Election. The Conservatives won the election and have a majority in Parliament of over 80 seats.

This is the first budget since the UK formally left the EU. The UK is currently in a transition period during which nearly all EU rules will continue to apply. The transition period is set to end after 31 December 2020. A future relationship is being negotiated by the UK and EU for the post-transition period.

The Budget comes at a time when concerns are rising about the public health and economic impacts of the coronavirus. The OBR’s forecast figures won’t reflect the latest developments with the virus, but its forecast summary will discuss its possible economic effects.

Heading into 2020, the UK economy was growing modestly. The decisive general election outcome reduced political uncertainty and led to improvements in business confidence in early 2020. Uncertainty over the future UK-EU relationship remains, however, with negotiations on a possible trade agreement having recently started.

The spread of coronavirus, first in China and now elsewhere, has already had an impact on the global economy. China is deeply intertwined in global supply chains and makes up around 16% of global economic output.

The Organisation for Economic Cooperation and Development (OECD) says that even if the virus is relatively contained the world economy will grow slower in 2020 than in 2019. The OECD forecasts that economic growth in the UK may slow from 1.4% in 2019 to 0.8% in 2020 in this scenario. If the outbreak is not contained and has a deeper impact on other economies, world economic growth in 2020 may halve according to the OECD’s analysis.

Risks to the outlook for the UK economy are high but the potential magnitude of any shock is very uncertain. Ultimately, the economic effects of coronavirus in the UK are intrinsically linked to the spread of the disease itself and the response of authorities, businesses and consumers to it.

The Government has pledged to “level up” economic conditions and opportunities across different regions of the UK. This is in response to regional economic inequalities throughout the UK. Current regional development policy is based on the principle of “localism”.

London and the South East account for 37% of the UK’s economic output. London’s output per head is well above the rest of the country and has grown faster since 1998. A similar, though less stark, picture is observed in productivity, which measures how much output is produced per hour worked. London and the South East are the only regions above the UK average.

Households’ disposable incomes give an indication of average living standards. They present a more nuanced and less unequal regional picture (partly due to redistribution through the tax and welfare system). If incomes are measured after housing costs, median disposable incomes are highest in the South East and lowest in the North East, while London ranks fifth highest.

With all these measures of inequality there are differences within regions, from local area to local area.

Government borrowing has decreased from the peaks reached following the 2007-2008 financial crisis and is now at a more typical level. Government borrowed £38 billion in 2018/19 to make up the difference between its spending and income raised from taxes and other sources. At 1.8% of GDP, this was below the average for the past 70 years.

Borrowing is likely to increase in the coming years. The Government wants an “infrastructure revolution” and is willing to borrow to pay for it, particularly at a time when it’s cheap for the Government to borrow.

Government debt – broadly speaking, the stock of past borrowing – increased following the 2007-2008 financial crisis and remains relatively high. Despite high levels of debt, government’s debt interest costs have remained relatively low. Markets are prepared to lend to the Government at historically low rates.

The Chancellor will propose new rules, or targets, to guide how he will manage the public finances. Once approved by Parliament, the new fiscal rules will replace the current set of rules, which the Johnson Government inherited.

The 2019 Conservative manifesto proposes a set of rules that are looser than the current set. They would allow the Government to borrow more for spending on infrastructure such as roads, buildings and other assets, but would restrict the Government’s ability to borrow for day-to-day spending on public services. The manifesto says the rules will result in lower government debt at the end of the Parliament (2024) than at the start.

If the Chancellor is to restrict borrowing for day-to-day spending, analysts suggest that he will have little room to announce extra day-to-day spending, or cut taxes, without raising other taxes.

The Spending Round in September 2019 set spending limits for Government departments in 2020/21. Departments’ budgets were increased by a total of £13 billion. The 2019 Conservative manifesto includes further smaller increases in day-to-day spending for the next four years.

A multi-year Spending Review is expected in 2020, which will set departments’ budgets for several years after 2020/21. It is possible that the Budget will include the total spending envelope that will be shared between departments at the Spending Review. It may be challenging for the Chancellor to increase spending in departments outside of those currently enjoying some level of protection (such as health and defence), while sticking to the manifesto’s fiscal rules.

Most working-age benefits will increase with inflation in April 2020. This will be the first increase in such benefits since April 2015.

The Conservative manifesto talks of an “infrastructure revolution”. The Government’s plans for infrastructure investment will be set out in the National Infrastructure Strategy. Reports suggest that this may be postponed until after the Budget. The Strategy will also include details of infrastructure to help meet the target of net zero carbon emissions by 2050.

Investing in infrastructure is seen by the Government as a way to help “level up” economic growth and productivity across the country. The Government is prepared to spend £20 billion extra a year on investing in infrastructure and to borrow more to do so. The Conservative manifesto allocated some of this spending to specific projects such as research and development, flood defences and repairing of potholes.

The Government has already made some major announcements about transport infrastructure, including confirming that HS2 will go ahead and plans to re-open branch lines closed in the 1960s. At the Budget, we may hear more about its Road Investment Strategy and the funding being provided to help local authorities improve local transport.

The Budget gives the Chancellor the opportunity to deliver on some of the tax proposals Conservative manifesto. The biggest – in terms of revenue raised – keeps the corporation tax rate at 19% thus cancelling the planned decrease to 17%. The most significant tax cut would mean individuals start making National Insurance contributions on their earnings over £9,500. The threshold would have otherwise risen by inflation to £8,788. Employees who benefit from this will pay £85 less in National Insurance a year.

A Digital Services Tax is set to be introduced in April 2020 and the Chancellor may take steps towards reforming Entrepreneurs’ relief – a tax break for business owners. Some issues with the tax relief received on pensions contributions may be addressed.

History suggests that we should expect more tax measures in the Budget. Chancellors have often been most active in making tax policy in the first year following a general election.