The UK budget: time to throw caution to the wind?

After ten years of painful spending cuts and austerity, the budget on 11 March is set to provide some fiscal relief to an economy that, arguably, needs such support.

However, the size of fiscal injection, if rules will be put on spending pledges and where spending will occur, is uncertain.

Driving this uncertainty was originally Prime Minister Boris Johnson’s February cabinet reshuffle and the departure of Sajid Javid as chancellor. Javid is a fiscal hawk whose desire for a strict rules-based approach to balancing the books appeared at odds with the prime minister.

Adding to the ambiguity has been the outburst of the coronavirus and its detrimental effect on financial markets. This could result in new chancellor Rishi Sunak arguing for more fiscal discretion given unusual circumstances.

Moderate discretion and delayed rules-based approach

Such an option is arguably justifiable in light of low interest rates, subdued inflation and a supply-side shock from Covid-19. Sunak can now use discretion to relax rules, such as ensuring the budget is balanced or in surplus, in five years’ time as opposed to in three years.

However, this is a significant break from the norm and its necessity will be questioned given that the current budget as it stands is balanced.

Another option, which appears the most attractive in terms of satisfying the need for fiscal discipline and ensuring chancellor Sunak’s independence, is to commit in areas affected by the virus and provide little elsewhere, with the opportunity to do so at the Autumn budget.

The budget usually happens in Autumn with the March budget this year a result of no Autumn budget last year. Assuming the current Brexit timetable, Sunak will have a much clearer idea of the type of post-Brexit relationship between the UK and European Union and the underlying momentum of the domestic and global economies. Not to mention a much clearer idea on containment of the virus.

Levelling up

While the size of fiscal stimulus remains open to question, an end to austerity for now is reason to cheer and is likely to have a material impact on the UK economy. This will be especially so if the government invests in areas with the highest gross domestic product multipliers, such as spending on health (almost inevitable given the outbreak) and police and investment in public construction focused on “levelling up” disadvantaged regions.

Fiscal spending gains converts

In our Outlook 2020, we anticipated that there would likely be a move towards fiscal stimulus globally given that it has long been required and central banks are running out of room to support the economy. It has been a talking point in the world’s largest economy, with the Democrat party announcing a $760bn infrastructure plan.

While any action will most likely follow the election and any bipartisan initiative may be smaller in scale, the topic of fiscal expenditure is here to stay.

As is potentially the case in the UK, the Covid-19 outbreak might be the catalyst for governments around the world to start spending more to support the economy. Hong Kong, Italy and China have already announced fiscal measures aimed at supporting their economy in the wake of the virus outbreak.

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