4 minute read 28 Feb 2021
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How the UK Budget can bridge the gap to a post-COVID-19 economy

Authors
Hywel Ball

UK Chair and UK&I Regional Managing Partner, Ernst & Young LLP

UK Chair and UK&I Regional Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

Howard Archer

Chief Economic Advisor

Chief Economic Advisor to EY ITEM Club. A leading voice of the UK and global economy.

4 minute read 28 Feb 2021

EY ITEM Club expects the Chancellor to balance the phasing-out of government support schemes with bolstering the post-COVID-19 recovery.

In brief
  • In the UK Budget, EY ITEM Club believes the Chancellor will announce plans to extend and then taper off the schemes currently in place to support the economy.
  • Other expected announcements include policies to help the UK economy make a smooth transition to the post COVID-19 environment.
  • Also in prospect are measures to accelerate long-term GDP growth and to help 'level up' the economy, including through higher investments in R&D.

In our EY ITEM CLUB Winter Forecast last month, we said the UK Budget on Wednesday, 3 March would be a critical event: a moment when Chancellor Rishi Sunak would need to articulate a plan for smoothly reducing public support for the UK economy, while simultaneously articulating a vision for the future. That moment has arrived against a fiscal and economic backdrop that’s been transformed over the past 12 months, with Government borrowing at levels last seen in the Second World War and the UK economy having shrunk by almost 10% in 2020.

Download the report for the full EY ITEM Club Budget Preview 2021.

The rollout of vaccines and the prospect of the economy reopening over the spring and summer means the Chancellor can look forward to fiscal policy exiting crisis mode. But while the need for massive fiscal interventions is hopefully tailing off, new challenges are emerging. These include how to bridge the gap to the brighter outlook ahead, smooth the economy’s adjustment to the post COVID-19 world and repair the damage to the public finances.

Measures to expect: three key focus areas

EY ITEM Club expects the Chancellor’s announcements in the Budget to focus on three main areas. First, the extension, and then phasing out, of the current support measures. Second, policies to smooth the economy’s post-pandemic adjustment. And third, actions to boost long-term growth and meet the Government’s ambitions around ‘levelling-up’ the UK economy, focused on public investment and R&D.

As well as ongoing and transitional support, businesses will also be looking to the Chancellor to set out a longer-term plan for the UK economy as they prepare their own post-COVID and post-Brexit investment plans
Hywel Ball,
UK Chair and UK&I Regional Managing Partner, Ernst & Young LLP

The economy has proved surprisingly resilient

The current lockdown will probably cause the OBR to forecast a fall in GDP in Q1 2021. However, the economy proved surprisingly resilient in the last quarter of 2020, and vaccines are being rolled out earlier than the OBR previously assumed. So it is likely to revise up the speed of the recovery later this year – and may also bring forward to early 2022 the point when it expects the economy to regain its pre-crisis size.

The Chancellor decided in late December to extend the life of the job retention scheme and government-backed business loans. And a weak start to the year for the economy will also push up government borrowing. However, the deficit in the first nine months of 2020–21 came in much lower than the OBR expected last November, so EY ITEM Club thinks the OBR’s forecast for borrowing this year will be little changed from November’s £394b (19% of GDP). And a stronger rebound in H2 2021 should mean the forecast deficit in 2021–22 will be revised down (excluding any new Budget measures).

Fiscal policy will remain the main lever

The continued low-interest rates environment means fiscal policy will remain the main macroeconomic policy lever for the foreseeable future. But a relaxation of COVID-19 restrictions should trigger a robust consumer recovery, as households release savings accumulated during lockdowns. This suggests there is little case for the Budget to include big, across-the-board stimulus measures. But there is a convincing argument for more nuanced support, focused on the three priorities highlighted above.

Household and business support may be in the final phase as we move into recovery

What will this mean in terms of specific announcements? The Chancellor may set out what is hopefully the final phase of support to households and firms, including a further extension to the furlough scheme, and possibly extending the temporary £20 per week increase in Universal Credit. He may also look to reduce economic ‘scarring’ through active labour market policies such as reskilling displaced workers. New ‘Eat Out to Help Out’-style schemes may be an option to support the rebound in consumer spending. And spending more on infrastructure and R&D could help to offset any COVID-19-related damage to the capacity of the UK economy.

Fiscal consolidation may have to come – but not now

Finally, EY ITEM Club would caution the Chancellor against tightening fiscal policy until room exists to cut interest rates. There is no sign of any significant constraints on government borrowing, and big tax rises or spending cuts would face political obstacles. However, Chancellor Sunak may still decide on some baby-steps towards austerity, including raising corporation tax. He may also give some insights into his longer-term fiscal strategy.

The Government is more involved in the economy than it has been for some time, and it is likely we will be operating in a policy-driven economy for the foreseeable future. It is therefore important that businesses closely track policy as it develops because the implications are potentially significant
Mark Gregory
EY UK Chief Economist

Summary

As he approaches his second UK Budget on 3 March 2021, the Chancellor faces an economic environment very different from a year ago when he presented his first. His overarching challenge is to trade-off the conflicting priorities of dialling down the Government’s pandemic-related support for the economy and fostering the post-pandemic recovery. EY ITEM Club expects the Budget statement to seek to balance these two priorities – by revealing a route map for the withdrawal of the current support schemes, alongside measures aimed both at aiding the economy’s post-pandemic readjustment, and also at boosting jobs and businesses through carefully-targeted spending initiatives. 

About this article

Authors
Hywel Ball

UK Chair and UK&I Regional Managing Partner, Ernst & Young LLP

UK Chair and UK&I Regional Managing Partner. Leading our 17,000 people in the UK. FTSE 100 audit partner. Father of three and Welsh rugby fan.

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

Howard Archer

Chief Economic Advisor

Chief Economic Advisor to EY ITEM Club. A leading voice of the UK and global economy.