Spring Budget 2021: Background briefing

The UK is just beginning to emerge from the latest lockdown put in place to slow the spread of the coronavirus. The Prime Minister has set out a roadmap which, all being well, could mean that all legal restrictions in England are lifted on 21 June. It is within this context that the Chancellor will deliver Spring Budget 2021, and the Office for Budget Responsibility (OBR) will produce its forecasts.

Economic situation

The pandemic has caused a severe recession. UK GDP fell by 9.9% in 2020.With lockdowns currently in force across the UK, the economy is likely to contract again in early 2021, but to a lesser extent than during the first national lockdown.

How quickly will the economy recover?

The Government’s plans to ease restrictions means that many businesses will continue to face severe challenges in the short term, with the economy not fully opening for several months. There are divergent views over how quickly the economy will recover once restrictions are eased.

The economic outlook therefore remains very uncertain and depends on the path of the pandemic and the reaction of households and businesses to new developments. In addition, a new UK-EU economic relationship has begun following the end of the Brexit transition period.

Will there be long-term economic damage?

The pandemic may have caused lasting harm, or ‘scarring’, to the UK economy. Damage to the economy’s supply capacity over the long term could come from different sources. Low investment during the crisis may reduce future productivity growth and some workers may lose skills after a prolonged period of unemployment. While estimates at this stage are very uncertain, the Bank of England has projected that the pandemic could lead to the economy’s supply capacity being 1¾ % lower in three years’ time.

Public finances Peacetime record borrowing

2020/21 has been a year unprecedented in peacetime for the public finances. Government borrowing – the difference between public spending and income raised from taxes and other sources – will reach a peacetime record.

Government debt – the stock of past borrowing – has increased from around 80% of GDP to 100% of GDP.

Unless the pandemic takes a very bad turn, government borrowing should be lower in 2021/22, compared with 2020/21, although borrowing will still be some way above pre-pandemic levels.

What does the future hold?

The Chancellor says that, once the economy recovers, he will put the public finances on a sustainable path. A key question for the Chancellor is: will government borrowing naturally fall to pre-pandemic levels or will he need to raise taxes or cut spending to achieve a sustainable position? Broadly speaking, the answer lies in how quickly the economy recovers and how much long-term economic damage (or scarring) the pandemic has caused. At this stage we don’t know the level of scarring.

Most economists agree that the Chancellor’s focus, for now, should be on preventing scarring, rather than reducing borrowing. They believe that continuing to provide financial support to the economy, through policies such as the furlough scheme, will help the public finances in the medium/long run. The Government can currently borrow at low cost to finance such support.

What might be in Spring Budget 2021?

It’s likely that the Chancellor will extend some of the virus-related policies that are supporting businesses, workers and households. Most of these schemes, including the furlough scheme, are currently due to end in March or April 2021. The Government say that the: “Budget will set out further detail on economic support to protect jobs and livelihoods across the UK” and that that the level of support to businesses and individuals will be tailored to: “reflect the changing circumstances”.

There has been speculation that some taxes, including corporation tax, may rise in the Budget. With the economic outlook still uncertain and another budget expected in autumn 2021, the Chancellor may wait to take some of these decisions. Alternatively, he may announce tax rises in the Budget for later in 2021/22 or later this Parliament.

The Chancellor’s biggest spending decisions will be made later in the year in the 2021 Spending Review, but the Budget may signal the start of the process. In the Budget, we might hear more about “levelling up”, replacing EU funding, the new UK Infrastructure Bank and policiesfor getting people back into work.

Further information

The Library will publish a summary of the Budget on the evening of 3 March.

The Library briefing The Budget and the annual Finance Bill discusses the way that Parliament debates the Budget and scrutinises the Finance Bill.

On 26 February, the Library will publish Economic Indicators, our analysis of the latest UK and international economic indicators. The latest data are also available on the Library’s UK economy dashboard.

The Library briefing Coronavirus: Economic impact examines the economic impact of the crisis to date and outlines the key issues for the outlook.

The latest coronavirus research and analysis from the Commons Library and other parliamentary research services is available on our coronavirus hub.