by Linda Yueh, Adjunct Professor of Economics, London Business School
The UK Budget set out necessary extensions to the various programmes to help people and businesses weather the Covid-19 restrictions until September. But it also set out the foundations of how the government plans to “build back better.”
Due to the scale of the economic damage, it’s even more important to support the recovery and help the UK recover to its 2019 pre-pandemic level of national output. Indeed, Chancellor Rishi Sunak said this Budget will “begin the work of building our future economy.”
The UK economy is now expected to return to its 2019 level by mid-2022, six months earlier than the previous November estimate of the Office for Budget Responsibility. But, in five years’ time, the economy would be 3% smaller than it would have been due to the pandemic.
As a result of the upgrade to the recovery, unemployment will peak at 6.5% instead of 7.5%. But, ensuring that it comes down will be important to ensure that people and the economy are not permanently affected.
The UK borrowed £355bn in 2020-21 because of the coronavirus crisis, equivalent to 17% of GDP, which is the highest level of public borrowing since the second world war. It won’t fall below 3% of GDP until 2024. Government debt will peak at 97.1% of GDP in 2023/24.
The Chancellor said it will take many decades to repair the public finances. He made a start by announcing a future increase in corporation tax to 25% from 2023, up from the current 19% level. Rishi Sunak also announced that he wanted an investment-led recovery and announced a new plan to cut taxes for businesses which invest for the next two years.
Given the scale of the fiscal challenge, the build back plan will need to focus on jobs and strengthen economic growth. The Chancellor said that borrowing at current record-low rates to invest was a principle for UK fiscal policy, which set up the various Budget measures to promote investment. The investment measures in turn were the inputs into the foundations of the future economy, which looks like it’ll focus on the environment, productivity and levelling up.
The Chancellor’s future economy looks greener. Green investment can generate more jobs as highlighted by the International Monetary Fund which I have written about previously in Forbes and thus create new sectors of economic growth.
The other targeted incentives for boosting investment in the Budget should also help growth since business investment is about 10% lower due to the pandemic and is a significant factor in raising productivity. Investment is particularly important since the pandemic has accelerated technological change, including the greater use of tech for remote working and e-commerce. Spending by firms to help workers and improving their infrastructure would help to make that adjustment.
Although there were levelling up measures including a new national infrastructure bank based in Leeds and eight new freeports across the country, which were described as special economic zones to make it easier to do business, the Leader of the UK’s Opposition, Sir Keir Starmer, pointed out that it, and the other measures announced, weren’t enough.
This is a long-standing challenge but important to build back not just better but also fairer since inequality is one of the biggest challenges alongside the climate crisis and the UK’s slow productivity growth.
Building back greener, fairer and better for people’s wages and standard of living are among the important parts of a future economy. We’ve had a glimpse of the foundations of the future UK economy. But, after the immediate focus on the pandemic eases somewhat, we will need the details of the building blocks of the longer-term plan to assess whether the future economy is indeed green, fair and productive.
Linda Yueh is Adjunct Professor of Economics at London Business School and the author of The Great Economists: How Their Ideas Can Help Us Today.
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March 03, 2021 at 10:18PM
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The Chancellor’s Build Back Better Budget - Forbes
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