NIESR Press Note: Budget 2021: Today’s triumphs won’t solve tomorrow’s problems
FOR IMMEDIATE RELEASE
- NIESR welcomes the extension of Covid-19 support measures but there was little sign today of the required support through the transition to a post-Covid economy.
- The Office for Budget Responsibility forecasts better unemployment and growth paths than in NIESR’s most recent forecasts. There is a need for government support in retraining, job creation and regional ‘levelling up’ policies which were not in evidence today.
- The Super Deduction of corporation tax may be very successful in getting profitable firms to bring forward investment, though at significant fiscal cost. Combined with the rise in corporation tax it creates a large cliff-edge for corporate taxation in 2023.
NIESR Deputy Director for Macroeconomic Modelling and Forecasting, Dr Hande Kucuk, said: “Despite improved prospects of recovery thanks to a successful vaccine roll-out, there is significant uncertainty regarding the long-term effects of Covid-19 with estimates of long-term scarring between 3-4 per cent. Given the extent of uncertainty, pre-committing to a fiscal tightening could add to the uncertainty and increase the chances of a costly U-turn if some of the downside risks materialize.”
- The Office for Budget Responsibility forecasts are more optimistic than NIESR’s in the medium term, with assumptions of 3 and 4 per cent permanent ‘scarring’ respectively as a result of Covid-19.
- Between 2021 and 2025 our latest forecast has UK GDP rising by a cumulative 14.4 per cent, compared with 17.3 per cent in the new OBR forecasts. A slower economic recovery will drive up the number of households in debt and/or poverty, which itself will hold back private consumption.
- This, as well as the additional fiscal stimulus factored into the OBR forecasts go some way to explaining why the OBR’s forecast for peak unemployment is lower at 6½ per cent than 7½ per cent in our latest forecast, which was produced before the announcement of the CJRS extension.
NIESR Deputy Director for Social and Political Economy, Prof Adrian Pabst, said: “We welcome the extension of the furlough and various support schemes to cushion the impact of Covid-19. What the Budget misses are policy interventions to address deep-seated problems that the pandemic has highlighted and exacerbated: active labour market policies to boost vocational and technical skills, increasing the stock of affordable housing, better access to finance for Small- and Medium-Sized Enterprise and a comprehensive industrial policy linked to more ambitious targets for the new UK infrastructure bank”.
- We welcome today’s Budget extending the Coronavirus Job Retention Scheme (CJRS), additional Universal Credit component and other support for businesses until later in 2020. Phasing in employer contributions is sensible but, as with other elements of fiscal support withdrawal, must be contingent on progress in eliminating the health threat and aligned with the roadmap for re-opening the economy, including allowing for subsequent changes to the current schedule.
- However the Chancellor said little today about support for job creation, which will need to gradually replace job protection as the economy exits from the pandemic lockdown. Additional spending for traineeships is welcome but the scale of active labour market policies – training, employment subsidies or direct job creation – remains well below the level likely to be necessary.
- The twin shocks of Covid-19 and Brexit have left uneven marks on the households, firms, sectors and regions of the UK economy. The Government’s debt reduction plans should be consistent with economic and social objectives for fiscal policy and there was little announced today about the ‘levelling up’ agenda or how policy measures will tackle regional and social inequality.
NIESR Principal Economist, Rory Macqueen, said: “Tax rises in 2023 are unlikely to be premature, though pre-announced rate rises run the risk of being reversed before implementation, increasing uncertainty unnecessarily. The Super Deduction will be of most benefit to profitable firms with large corporation tax bills, and of none at all to those who have not been profitable during the pandemic, but may be very effective at bringing private investment forward to the next two years especially in large companies. There must be some doubt about whether it will be withdrawn alongside a six-point rise in corporation tax in 2023.”
- Recent NIESR research indicates that it is preferable to increase taxes before reducing spending because of their more limited impact on the economic recovery initially. Our research also suggests that rises in income tax rates would have a smaller economic impact than rises in sales or corporation taxes.
- We expect the Bank of England to continue supporting the Government’s fiscal response, including through its quantitative easing programme. While this has shortened the maturity of public debt, exposure to short-term interest rates will only materialise if the Bank tightens policy rates significantly in response to a faster-than-expected economic recovery, while retaining the purchased gilts, and are likely to be outweighed by the tax consequences of such a recovery.
- A Comprehensive Tax Review is required to look at the changing form of the economy, including trends towards automation, and its tax richness post-Covid. We also lack a clear framework for whether and when monetary-fiscal policy coordination is appropriate, something which should be considered alongside the toolkit at the disposal of the Monetary Policy Committee.
Notes for editors:
The latest NIESR forecasts for the UK and Global economies can be found here.
NIESR staff will be available to comment the Budget throughout the day. For queries and to arrange interviews, please contact the NIESR Press Office: press [at] niesr.ac.uk / l.pieri [at] niesr.ac.uk / 07930 544 631
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