BRIEFING PAPER Number CBP-8842, 5 March 2020
By Matthew Keep Spring Budget 2020: Philip Brien Daniel Harari Chris Rhodes Background briefing
Contents: 1. Introduction 2. Economic situation 3. Regional economic inequalities 4. The public finances 5. New rules for the public finances 6. Public spending: developments since March 2019 7. Infrastructure: spending and policy 8. Tax 9. Next steps
www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary 2 Spring Budget 2020: Background briefing
Contents
Summary 4 1. Introduction 7 1.1 Autumn Budget 2019 was postponed: What’s happened since? 7 1.2 Brexit 8 Negotiating the future relationship 8 How has the OBR forecast for Brexit? 8 1.3 Will the forecasts be affected by coronavirus? 9 2. Economic situation 11 2.1 Economic developments up to early 2020 11 2.2 Economic outlook 12 2.3 Potential impact of coronavirus 15 3. Regional economic inequalities 19 3.1 GDP and GDP per head comparisons 19 3.2 Differences in productivity 21 3.3 Household incomes 24 3.4 Regional economic development policy 25 3.5 Further information 28 4. The public finances 29 4.1 Government borrowing (the deficit) 29 4.2 Current budget deficit 32 4.3 Government Debt 33 5. New rules for the public finances 36 5.1 A new set of rules 36 5.2 Why are new rules being proposed? 40 5.3 How constraining are the new rules? 42 5.4 Further information 45 6. Public spending: developments since March 2019 47 6.1 Spending announced since Spring Statement 2019 47 6.2 Replacing EU funding after Brexit 50 6.3 The end of the benefits freeze 51 7. Infrastructure: spending and policy 55 7.1 National Infrastructure Strategy 55 7.2 Infrastructure spending 56 7.3 R&D spending 60 7.4 Transport 61 7.5 Flood risk management 61 8. Tax 64 8.1 Conservative manifesto 64 8.2 Other tax issues 70 Entrepreneurs’ relief: a review? 71 A Digital Services Tax 72 8.3 Pensions tax relief: current issues 74 9. Next steps 77 Appendix: Economic and public finance data 1979-2023 79 3 Commons Library Briefing, 5 March 2020
Contributing Authors: Paul Bolton, Louise Butcher, Jonathan Finlay, Niamh Foley, Steven Kennedy, Djuna Thurley, Rod McInnes, Matthew Ward
Cover page image copyright: Palace of Westminster with daffodils by Ming Jun Tan /
image cropped. Licensed under Unsplash License.
4 Spring Budget 2020: Background briefing
Summary
This briefing sets out the background to Spring Budget 2020 which will take place on 11 March 2020. The Office for Budget Responsibility (OBR) will publish revised forecasts for the economy and public finances on the same day. A Budget was planned for autumn 2019, but it was delayed by the 2019 General Election. The Conservatives won the election and have a majority in Parliament of over 80 seats. This is the first budget since the UK formally left the EU. The UK is currently in a transition period during which nearly all EU rules will continue to apply. The transition period is set to end after 31 December 2020. A future relationship is being negotiated by the UK and EU for the post-transition period. The Budget comes at a time when concerns are rising about the public health and economic impacts of the coronavirus. The OBR’s forecast figures won’t reflect the latest developments with the virus, but its forecast summary will discuss its possible economic effects. Economic situation Economic situation (section 2) Heading into 2020, the UK economy was growing modestly. The decisive general election outcome reduced political uncertainty and led to improvements in business confidence in early 2020. Uncertainty over the future UK-EU relationship remains, however, with negotiations on a possible trade agreement having recently started. The spread of coronavirus, first in China and now elsewhere, has already had an impact on the global economy. China is deeply intertwined in global supply chains and makes up around 16% of global economic output. The Organisation for Economic Cooperation and Development (OECD) says that even if the virus is relatively contained the world economy will grow slower in 2020 than in 2019. The OECD forecasts that economic growth in the UK may slow from 1.4% in 2019 to 0.8% in 2020 in this scenario. If the outbreak is not contained and has a deeper impact on other economies, world economic growth in 2020 may halve according to the OECD’s analysis. Risks to the outlook for the UK economy are high but the potential magnitude of any shock is very uncertain. Ultimately, the economic effects of coronavirus in the UK are intrinsically linked to the spread of the disease itself and the response of authorities, businesses and consumers to it. Regional economic inequalities (section 3) The Government has pledged to “level up” economic conditions and opportunities across different regions of the UK. This is in response to regional economic inequalities throughout the UK. Current regional development policy is based on the principle of “localism”. London and the South East account for 37% of the UK’s economic output. London’s output per head is well above the rest of the country and has grown faster since 1998. A similar, though less stark, picture is observed in productivity, which measures how much output is produced per hour worked. London and the South East are the only regions above the UK average. 5 Commons Library Briefing, 5 March 2020
Households’ disposable incomes give an indication of average living standards. They present a more nuanced and less unequal regional picture (partly due to redistribution through the tax and welfare system). If incomes are measured after housing costs, median disposable incomes are highest in the South East and lowest in the North East, while London ranks fifth highest. With all these measures of inequality there are differences within regions, from local area to local area. Public finances Borrowing and debt (section 4) Government borrowing has decreased from the peaks reached following the 2007-2008 financial crisis and is now at a more typical level. Government borrowed £38 billion in 2018/19 to make up the difference between its spending and income raised from taxes and other sources. At 1.8% of GDP, this was below the average for the past 70 years. Borrowing is likely to increase in the coming years. The Government wants an “infrastructure revolution” and is willing to borrow to pay for it, particularly at a time when it’s cheap for the Government to borrow. Government debt – broadly speaking, the stock of past borrowing – increased following the 2007-2008 financial crisis and remains relatively high. Despite high levels of debt, government’s debt interest costs have remained relatively low. Markets are prepared to lend to the Government at historically low rates. New fiscal rules for the public finances (section 5) The Chancellor will propose new rules, or targets, to guide how he will manage the public finances. Once approved by Parliament, the new fiscal rules will replace the current set of rules, which the Johnson Government inherited. The 2019 Conservative manifesto proposes a set of rules that are looser than the current set. They would allow the Government to borrow more for spending on infrastructure such as roads, buildings and other assets, but would restrict the Government’s ability to borrow for day-to-day spending on public services. The manifesto says the rules will result in lower government debt at the end of the Parliament (2024) than at the start. If the Chancellor is to restrict borrowing for day-to-day spending, analysts suggest that he will have little room to announce extra day-to-day spending, or cut taxes, without raising other taxes. Government’s day-to-day spending (section 6) The Spending Round in September 2019 set spending limits for Government departments in 2020/21. Departments’ budgets were increased by a total of £13 billion. The 2019 Conservative manifesto includes further smaller increases in day-to-day spending for the next four years. A multi-year Spending Review is expected in 2020, which will set departments’ budgets for several years after 2020/21. It is possible that the Budget will include the total spending envelope that will be shared between departments at the Spending Review. It may be challenging for the Chancellor to increase spending in departments outside of those currently enjoying some level of protection (such as health and defence), while sticking to the manifesto’s fiscal rules. Most working-age benefits will increase with inflation in April 2020. This will be the first increase in such benefits since April 2015.
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Infrastructure (section 7) The Conservative manifesto talks of an “infrastructure revolution”. The Government’s plans for infrastructure investment will be set out in the National Infrastructure Strategy. Reports suggest that this may be postponed until after the Budget. The Strategy will also include details of infrastructure to help meet the target of net zero carbon emissions by 2050. Investing in infrastructure is seen by the Government as a way to help “level up” economic growth and productivity across the country. The Government is prepared to spend £20 billion extra a year on investing in infrastructure and to borrow more to do so. The Conservative manifesto allocated some of this spending to specific projects such as research and development, flood defences and repairing of potholes. The Government has already made some major announcements about transport infrastructure, including confirming that HS2 will go ahead and plans to re-open branch lines closed in the 1960s. At the Budget, we may hear more about its Road Investment Strategy and the funding being provided to help local authorities improve local transport. Tax (section 8) The Budget gives the Chancellor the opportunity to deliver on some of the tax proposals Conservative manifesto. The biggest – in terms of revenue raised – keeps the corporation tax rate at 19% thus cancelling the planned decrease to 17%. The most significant tax cut would mean individuals start making National Insurance contributions on their earnings over £9,500. The threshold would have otherwise risen by inflation to £8,788. Employees who benefit from this will pay £85 less in National Insurance a year. A Digital Services Tax is set to be introduced in April 2020 and the Chancellor may take steps towards reforming Entrepreneurs’ relief – a tax break for business owners. Some issues with the tax relief received on pensions contributions may be addressed. History suggests that we should expect more tax measures in the Budget. Chancellors have often been most active in making tax policy in the first year following a general election. 7 Commons Library Briefing, 5 March 2020
1. Introduction
This briefing sets out the background to Spring Budget 2020, which will take place on Wednesday 11 March. The new Chancellor, Rishi Sunak, will make the Budget statement to the House of Commons outlining the state of the economy and the Government’s proposals for the public finances. The Treasury will publish the Budget Report and other related documents. The Office for Budget Responsibility (OBR) will publish revised forecasts for the economy and public finances on the same day.
1.1 Autumn Budget 2019 was postponed: What’s happened since? The previous Chancellor, Sajid Javid, was set to deliver Autumn Budget 2019 on 6 November. However, having lost a key vote on the UK’s exit from the EU (on the timetabling of the Withdrawal Agreement Bill) the Government said that the Budget would be postponed, and they would instead be pressing for a General Election. 1 2019 was the first year in recent history without a Budget Statement. No year in the 20th century passed without at least one and the same could have been said of the 21st century, until 2019. The Conservatives have a majority in Parliament The Conservatives won the 2019 General Election and were returned to power with a majority of over 80. Shortly into the new year a date was set for the 2020 Spring Budget. The Library has published more information about the 2019 General Election in the briefing paper General Election 2019: full results and analysis and other briefings. The UK has left the EU… The Government’s majority made passing the European Union (Withdrawal Agreement) Bill simpler. The European Union (Withdrawal Agreement) Act 2020 became law on 23 January 2020 and the UK formally left the EU at 11pm on 31 January. …and has entered a transition period The UK has entered a transition period during which nearly all EU rules will continue to apply to the UK. The UK will still be part of the EU single market and customs union. Existing trade arrangements and rules for travelling within the EU will continue to apply. The transition period was conceived as a bridging period while the UK and EU negotiate a new relationship. It will last until the end of December 2020. There is provision for the transition period to be
1 On 22 October 2019 The EU (Withdrawal Agreement) Bill passed its second reading, but the programme motion setting out the timetable was defeated. The PM paused the legislation.
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extended for one or two years, but the Government has said it won’t seek an extension. It has also legislated to prohibit itself from doing so. There is more information on the transition period in the Library Insight Brexit next steps: The transition period.
1.2 Brexit Negotiating the future relationship Assuming the transition period isn’t extended, the UK and EU will enter a new economic relationship on 1 January 2021, which will be negotiated during 2020. On 24 February 2020, the European Council – made up of the heads of government of EU Member States – agreed the EU’s negotiating objectives. 2 On the following day, the UK Government published its approach to the UK’s future relationship with the EU. 3 Formal negotiations began on 2 March. The Library briefing The UK-EU future relationship negotiations: process and issues outlines the UK and EU's objectives, the main issues of contention and the process being followed in the negotiations. The Library briefing Brexit timeline: events leading to the UK’s exit from the European Union provides a timeline of the major events leading up to the EU referendum and subsequent dates of note, looking ahead to expected events as the UK and EU negotiate the future relationship. How has the OBR forecast for Brexit? The OBR is required to produce its forecasts for the economy and public finances based on current Government policy and the forecasts are adopted by the Government as their official forecasts. 4 Forecasting is difficult at the best of times. The UK’s withdrawal from the EU makes it even more so. As the OBR explains, this is because it isn’t a momentary event, but an extended process of policy development “to which the economy and the public finances are already responding in real time – based not just on concrete policies implemented, but also (especially to date) on how decision makers in both the public and private sectors expect policy to evolve.” 5 In terms of the period after the end of the transition period (from 1 January 2020), the OBR has attempted to base its judgements on Government policy but, as the final outcome will depend on further UK policy development as well as the result of negotiations with the EU, the OBR has had “no meaningful basis” for predicting the future EU-UK relationship. 6 Faced with this uncertainty, the OBR has made some broad-brush judgements – consistent with most external studies – about
2 European Commission Press Release, Future EU-UK Partnership: European Commission receives mandate to begin negotiations with the UK, 25 February 2020 3 UK Government. The Future Relationship with the EU, 27 February 2020 4 The Government retains the right to disagree with the OBR’s forecasts and, if this is the case, will explain why to Parliament. The Government has not yet disagreed. 5 OBR, Discussion paper No. 3: Brexit and the OBR’s forecasts, October 2018, para 1.2 6 OBR. Economic and fiscal outlook – March 2019, para 1.15
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the period after the end of transition. The OBR assumes that for the period of its five-year forecasts any likely Brexit outcome will lead to: lower trade flows; lower business investment; and lower net inward migration than would otherwise have been seen. Taken together they result in lower potential economic output. 7 In the longer term the OBR says that decisions made by UK Governments in areas such as trade and regulation will determine whether future economic growth is enhanced or impeded. 8 Theresa May’s Government published analysis of the long-term impact of Brexit on the economy. The Library Insight Brexit and the economy: Government analysis of the long-term impact summarises the Government’s analysis. While the OBR has set out how it incorporates Brexit in its forecasts, it notes that there is “significant uncertainty about the effects of Brexit on the UK economy, especially since no major country has left the EU or a similar trading bloc”. 9
1.3 Will the forecasts be affected by coronavirus? The new viral disease, which is formally known as covid-19, has spread around the world despite efforts to contain it. This public health issue will have an impact on the world and UK economies. At this stage we can’t be sure how significant or prolonged the effect will be. As section 2.3 explains, the economic effects of coronavirus in the UK are intrinsically linked to the spread of the disease itself and the response of authorities, businesses and consumers to it. The OBR’s final underlying forecast closes a couple of weeks before Budget day. At that point, key judgements about the economy and the data from the financial markets were finalised. Therefore, the very latest developments with the virus won’t factor into the forecast. The OBR will discuss the virus’s potential economic impact in the forecast commentary, stressing the uncertainty that the virus adds to the already inherently uncertain forecasts. It’s likely that they will broadly explain how the developing situation could affect the economic outlook.
Box 1.1: The OBR will produce an additional forecast on 13 March The OBR is required to produce at least two forecasts in each financial year. The Chancellor commissions the forecasts from the OBR. As Autumn Budget 2019 was cancelled, the OBR’s Spring Budget forecast will be their first of 2019/20. Once this is published there will only be a few weeks left of 2019/20.
7 OBR. Economic and fiscal outlook – November 2016, para 1.5 8 OBR. Economic and fiscal outlook – November 2016, para 1.5 9 OBR. Discussion paper No. 3: Brexit and the OBR’s forecasts, October 2018 para 5.16
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So that the OBR can fulfil its legal responsibility to produce two forecasts, the Chancellor has commissioned another forecast, which will be published on 13 March 2020. 10 Coming two days after the Budget, this additional forecast will pick up, in the words of Robert Chote, the Chair of the OBR, “some of the loose ends that always remain at the end of the forecast process”. 11 An alternative solution to the dilemma would have been to seek Parliamentary approval for amending the law to set aside the OBR’s duty to publish two forecasts in 2019/20. For Mr Chote, this was the cleanest solution, but it would have taken Parliamentary time and approval.
10 Letter from Chancellor of the Exchequer to Robert Chote on OBR's second forecast, 27 February 2020 11 Letter from Robert Chote to Chancellor of the Exchequer on OBR's second forecast, 27 February 2020 11 Commons Library Briefing, 5 March 2020
2. Economic situation
Summary Heading into 2020, the UK economy was growing modestly, having slowed over the course of 2019. The decisive General Election outcome and subsequent reduction in political uncertainty led to improvements in business confidence in early 2020. Uncertainty over the future UK-EU relationship remains, however, with negotiations on a possible trade agreement having recently started. The spread of coronavirus, first in China and now elsewhere, has already had an impact on the global economy. China is deeply intertwined in global supply chains and makes up around 16% of global GDP. OECD analysis of a scenario where the spread of the virus is relatively contained leads to a reduction in world GDP growth from 2.9% in 2019 to 2.4% in 2020. The OECD forecasts GDP growth in the UK to slow from 1.4% in 2019 to 0.8% in 2020 in this case. If the outbreak is not contained and has a deeper impact on other economies, world GDP growth in 2020 may halve to 1.5% in the OECD analysis. Risks to the UK economic outlook are high but the potential magnitude of any shock is very uncertain. Ultimately, the economic effects of coronavirus in the UK are intrinsically linked to the spread of the disease itself and the response of authorities, businesses and consumers to it.
2.1 Economic developments up to early 2020 The economic outlook is uncertain as a result of the evolving coronavirus outbreak. The potential economic effects of this are explored in section 2.3. This section gives an overview of economic conditions in 2019 and in early 2020. GDP growth was erratic but weaker during 2019 GDP growth over the course of 2019 was volatile, partly reflecting fast- moving political developments and changing Brexit deadlines.
Underlying weakness in GDP growth during 2019 % change in GDP compared with previous quarter
0.6
0.4
0.2
0.0 0.0
-0.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2017 2018 2019
Source: ONS, series IHYR [latest data update 11 Feb 2020] GDP rose relatively strongly in Q1 2019, partly a consequence of stockpiling ahead of the Brexit deadline at the time (29 March 2019).
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The payback was a small decline in quarterly GDP in Q2. Another stronger outturn in Q3 was followed by zero growth in Q4. This yo-yoing of quarterly data somewhat obscures the underlying (modest) downward trend. GDP was 1.1% higher in Q4 2019 than it was a year before, with a broad-based slowdown seen in different sectors.12 As well as domestic factors, the global economy weakened in 2019 with global trade tensions hitting international trade. Business confidence improved in early 2020 The decisive General Election result and the associated reduction in political uncertainty appears to have lifted business confidence. Surveys of sentiment in early 2020 reflected improved output expectations.13 For example, the closely watched IHS Markit Purchasing Managers’ Index (PMI) for both the services and manufacturing sectors have been marked by upturns in reported economic activity.
Upturn in services and manufacturing activity in early 2020 Markit PMI index (value above 50 indicates growth)
56 Services 53
50
47 Manufacturing 44 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 2019 2020
Source: IHS Markit/CIPS UK services and manufacturing PMIs The key question prior to the coronavirus outbreak was whether the improvement in business surveys would be reflected in ‘hard’ economic data (like GDP). GDP growth data for January 2020 will be published at 9.30am on 11 March 2020, the day of the Budget. The Library’s economic indicator page on GDP will be updated shortly after the Office for National Statistics release the data. It will also be available immediately on the Library’s UK economy dashboard.
2.2 Economic outlook Labour market still strong and government spending growth to pick up The labour market ended 2019 with the highest employment rate (76.5%) and joint-lowest unemployment rate (3.8%) since comparable records began in 1971.14 Annual growth rates in average earnings
12 ONS, series IHYR and ONS, GDP first quarterly estimate, UK: October to December 2019, 11 February 2020 13 For an overview see Bank of England, Monetary Policy Report – January 2020, p2 14 ONS, Labour market overview, UK: February 2020, 18 February 2020
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slowed over the second half of 2019 from 4% to just below 3% but remain comfortably above inflation.15
Average earnings growth outpacing inflation % change in ave earnings and CPI prices compared with year ago
Average earnings 4
3
2 CPI 1
0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 2017 2018 2019
Sources: ONS, KAB9 (wages) and D7G7 (CPI), 3-month ave data to month shown Overall, the labour market remains broadly supportive of steady – if unspectacular – growth in household incomes. On its own, this should underpin a continuation of recent consumer spending growth of around 1-1.5% per year.16 However, uncertainty related to the potential impact of the coronavirus on economic activity and confidence could derail the outlook for consumer spending. Even before possible public spending announcements at the upcoming Budget, previous planned increases in spending will provide GDP growth with a boost in 2020/21. The Bank of England has estimated that the announced public spending commitments made at the September 2019 Spending Round is, all else being equal, expected to raise GDP by around 0.4% by 2023.17 Future UK-EU economic relationship uncertain Immediate Brexit-related uncertainty diminished following the election result and subsequent ratification of the Withdrawal Agreement. This ensured an orderly UK departure from the EU on 31 January 2020. The UK is now in a transition period, where the economic relationship between the UK and EU is essentially unchanged, despite the UK not being an EU member state. The transition period is scheduled to run until the end of 2020. An extension for up to a further two years is allowed for under the Withdrawal Agreement but the UK Government has said it does not want one (and has legislated to prevent an extension). This leaves the future UK-EU relationship to be negotiated. While the terms of a potential UK-EU trade deal are not resolved, uncertainty over the long-term economic relationship will persist. Assuming no extension
15 More information on the labour market can be found in Commons Library briefing paper, People claiming unemployment benefits by constituency, 18 February 2020 16 ONS, series KGZ7 (household expenditure growth) 17 Bank of England, Monetary Policy Report – January 2020, p22
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to the transition period, businesses will face different requirements in trading with the EU from the beginning of 2021. The UK is seeking a free trade agreement, with no tariffs or quotas on UK-EU trade.18 Should no agreement be reached, UK-EU trade would be based on World Trade Organisation (WTO) rules, with tariffs on certain goods and higher non-tariff barriers to trading. The UK and EU began negotiations in early March. Even with a free trade agreement, barriers to trade between the UK and EU will be greater than they are currently. Most forecasters, including the Bank of England and OECD, have assumed that a UK-EU free trade agreement is negotiated by the end of 2020. Further background and detail is available in the Commons Library briefing paper, The UK-EU future relationship negotiations: process and issues. Persistent weakness in productivity growth UK productivity growth has been weak in recent years, continuing the trend seen since the 2007-09 global financial crisis. This trend has also been seen across advanced economies, although the magnitude of the slowdown in the UK is particularly stark: from one of the highest rates in the G7 to one of the lowest.19 Historically, UK labour productivity has grown by a little above 2% per year but over the past decade or so, it has stagnated. In 2019, there was no growth in productivity compared with 2018.20
Productivity has stagnated since the financial crisis GDP per hour, index where Q4 2007 level = 100
110
100
90
80
70 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: ONS, series LZVB and flash estimate for Q4 2019 Productivity growth is the essential ingredient for sustainable economic growth and rising living standards over the long-term. A continuation of the recent anaemic productivity growth rates would have detrimental consequences, including on the public finances. Most economic forecasters anticipate a recovery in upcoming years (although not back to pre-crisis trends). However, the Bank of England,
18 HM Government, The Future Relationship with the EU: The UK's Approach to Negotiations, CP211, 27 February 2020 19 Commons Library, Briefing for debate on ‘National Productivity’, January 2020 20 ONS, “UK productivity flash estimate: October to December 2019”, 18 February 2020
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in its January 2020 assessment of the economy, downgraded its expectations of productivity growth to only around 0.5% per year until 2023.21 In its last forecast made in March 2019, the OBR anticipated productivity growth to pick up, reaching 1.3% by 2023.22 One of the most important aspects of the OBR economic assessment at the Spring 2020 Budget will be whether, and by how much, the OBR changes this. Should it cut its expectations of productivity growth, this would put downward pressure on its GDP growth and average wage forecasts. In turn, this would weaken its outlook for the public finances.
2.3 Potential impact of coronavirus The outbreak of coronavirus (Covid-19) originated in China but by early March had spread to many countries around the world. As well as the significant public health considerations, there are potentially large economic impacts. These will be linked to how far and fast the virus spreads, as well as the actions taken in response to it. China The biggest economic impact as of early March has been in China, the epicentre of the outbreak. China plays a large role in the global economy. It is now a much larger economy than it was at the time of the SARS virus outbreak in 2002-2003. In 2003, China accounted for 4.3% of world GDP; in 2019, it was 16.3%.23 China accounts for a large share of demand for many commodities, is heavily integrated into global supply chains, and is a big player in global tourism (approximately 10% of all cross-border tourists come from China).24 The economic impact of the virus and the subsequent “lockdowns” of vast numbers of people and businesses are still unclear, but some early data releases are available. It was reported that car sales in China were down 80% in February 2020 compared the year before25 and surveys of businesses showed record falls in activity.26 Global impact The direct impact on the rest of the global economy emanating from China can be felt in disruptions to global supply chains, weaker Chinese import demand for goods and services, and a decline in tourism-related
21 Forecasts are for potential or trend productivity growth; Bank of England, Monetary Policy Report – January 2020, 30 January 2020, section 4 22 Forecasts are for potential or trend productivity growth; OBR, Economic and fiscal outlook, March 2019, p33, table 3.1 23 Library calculations based on IMF data, at market exchange rates 24 OECD Interim Economic Assessment, Coronavirus: The world economy at risk, 2 March 2020 25 Bloomberg news via Yahoo! Finance, “China Car Sales Drop Record 80% as Virus Empties Showrooms”,4 March 2020 26 Caixin China General Services PMI, “Coronavirus outbreak leads to record drop in business”, 4 March 2020
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activities.27 The spread of the virus across Asia and into North America, Europe and elsewhere widens the scope for economic damage to occur. Some sectors have already been hit hard, particularly the travel and tourism sector. Many carmakers are also experiencing disruption to their supply chains, including in the UK. For example, Jaguar Land Rover’s Chief Executive has said that the firm brought some Chinese components to the UK in suitcases as a precaution.28 Apple has warned that coronavirus disruption means it will not hit its revenue targets for the first quarter of 2020.29 The OECD, in an assessment of the world economy, provided some scenario analyses of what the impact of coronavirus could be.30 In its main scenario, the virus outbreak is short-lived and is contained outside of China. In this case, the OECD forecasts Chinese growth to slow from 6.1% in 2019 to 4.9% in 2020 and for global growth to ease from 2.9% in 2019 to 2.4% in 2020.
GDP growth to slow this year following Coronavirus outbreak 2019 data and OECD forecasts* for 2020, annual % change in GDP
* OECD's "contained outbreak" scenario UK
China
USA 2019 Germ any 2020 World
0 1 2 3 4 5 6
Source: OECD, Interim Economic Outlook, 2 March 2020 The OECD also provided an “illustrative scenario” where the outbreak is spread much more widely across the world. In this scenario, global growth of only 1.5% in 2020 can be expected according to the OECD analysis. In summary, the OECD warned that “the world economy is in its most precarious position since the global financial crisis”.31 Financial markets and central bank policy response Concerns over the economic impact of coronavirus and corporate profitability led to global stock markets to fall by over 10% in the week ending 28 February, the biggest fall since the apex of the global financial crisis in 2008.32
27 OECD Interim Economic Assessment, Coronavirus: The world economy at risk, 2 March 2020, p2 28 “UK car factories running out of parts due to coronavirus, warns Jaguar”, Guardian, 18 February 2020 29 “Apple warns coronavirus will hurt iPhone supplies” BBC News, 17 February 2020 30 OECD Interim Economic Assessment, Coronavirus: The world economy at risk, 2 March 2020, p2 31 OECD, Tackling the fallout from the coronavirus, 2 March 2020 32 “US stocks close lower again for worst week since 2008”, Financial Times, 28 February 2020
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Investors also bought government bonds – seen as a ‘safe haven’ asset class – pushing down their yields (the interest return on bonds). For example, the UK 10-year gilt yield of 0.37% on 4 March, was down from 0.56% the month before.33 In response to the growing economic risk, central banks around the world have eased monetary policy. On 3 March, the US Federal Reserve cut interest rates by 0.5 percentage points to a range of 1.0%-1.25%.34 This move was outside of its regularly scheduled policy calendar. As of 4 March, the Bank of England has not cut rates – currently at 0.75% – in response to the risks associated with coronavirus. The next meeting of the Monetary Policy Committee is scheduled to conclude 26 March, although it does not have to wait until then to change rates. UK impact Before the spread of the virus beyond China, forecasts for UK GDP growth in 2020 were generally around 1%.35 The OECD, in its assessment of the global economy noted above, lowered its forecasts for UK growth in 2020 from 1.0% to 0.8%.36 This was based on the OECD’s scenario of the outbreak being “mild and contained” outside of China. A more severe scenario, where coronavirus spreads much more intensively could see much larger effects. UK-specific forecasts under this scenario were not published by the OECD but European growth in 2020 could be 1 percentage point lower in this scenario compared with the “mild” scenario. (Section 1.3 looks at how the OBR may address the uncertainty related to the spread of coronavirus in its forecasts.) On 3 March, Bank of England Governor Mark Carney stated that the Bank is ready to provide support to the UK economy: The Bank of England’s role is to help UK businesses and households to manage through an economic shock that could prove large, but will ultimately be temporary. The Bank will take all necessary steps to support the UK economy and financial system consistent with its statutory responsibilities.37 Andrew Bailey, who will take over as Bank of England Governor on 16 March, also stated that the Bank was ready to provide support.38 Most of the focus on the economic impact has so far been on the direct impact – for example, supply chain disruptions or employees taking time off work. Reductions in output for these supply-side reasons may be
33 Financial Times, Markets data, UK yield curve [accessed 4 March 2020] 34 Federal Reserve press release, “Federal Reserve issues FOMC statement”, 3 March 2020 35 HM Treasury, Forecasts for the UK economy: a comparison of independent forecasts, 19 February 2020 36 OECD Interim Economic Assessment, Coronavirus: The world economy at risk, 2 March 2020, p2 37 Treasury Committee, Oral evidence: Bank of England Monetary Policy Reports, 3 March 2020, Q2 38 “Andrew Bailey insists Bank of England will move quickly on coronavirus”, Financial Times, 4 March 2020
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temporary, and, assuming the virus is contained, may be made up to a large degree subsequently. What could cause a larger economic effect is if consumers changed their behaviour and cut back on their spending.39 Consumer spending accounts for over 60% of GDP and is therefore vitally important to the economy. In summary, risks to the UK economic outlook are high but the potential magnitude of any shock is very uncertain. Ultimately, the economic effects of coronavirus in the UK are intrinsically linked to the spread of the disease itself and the response of authorities, businesses and consumers to it.
39 Simon Wren-Lewis, mainly macro blog, “The economic effects of a pandemic”, 2 March 2020 19 Commons Library Briefing, 5 March 2020
3. Regional economic inequalities
Summary The Government has pledged to “level up” economic conditions and opportunities across different regions of the UK. This pledge is in response to regional inequalities of economic performance. Current regional development policy is based on the principle of “localism” that began during the 2010-15 Coalition Government. London and the South East account for 37% of the UK’s economic output, as measured by GDP. London’s GDP per head is well above the rest of the country. Growth in GDP per capita between 1998-2018 was also fastest in London (a cumulative 46%) followed by the North West (39%). The East Midlands recorded the slowest growth per head (23%). A similar, though less stark, picture is observed in productivity (as measured by GDP per hour worked). London (32% above the UK average) and the South East (9%) are the only regions above the UK average. Regional figures can, however, mask – sometimes large – differences within regions, from local area to local area. Statistics on median household disposable incomes – an indicator of average living standards – by region show a more nuanced and less unequal picture (partly due to redistribution through the tax and welfare system). If housing costs are taken into account, median disposable incomes are highest in the South East and lowest in the North East, while London ranks equal fifth highest.
3.1 GDP and GDP per head comparisons The Government has stated that the Budget will set out plans to “level up” economic conditions and opportunities across the UK. 40 What are the inequalities of economic performance that this policy is seeking to address? There are several different economic statistics one can use to compare the performance of regional economies across the UK. As statisticians explore newly available datasets, figures for smaller geographies such as local authorities are also increasingly being published. 41 Looking at the most prominent measure of economic performance, Gross Domestic Product (GDP), shows the disproportionate contribution of London and the South East to UK GDP. In 2018 (latest available data), London accounted for 22.8% of UK GDP, with the South East adding another 14.5%. Their combined 37.3% of UK GDP compares with these two regions making up 27.1% of the UK population. 42 As a result, GDP per head is much higher in London (£54,700) than the rest of the UK (UK average is £32,000). Only London and the South East
40 HM Treasury press release, “Chancellor launches Budget process to usher in ‘decade of renewal’”, 7 January 2020 41 For example, administrative VAT data is being used by the ONS to get a richer source of information from businesses. 42 All figures calculated from ONS, Regional economic activity by gross domestic product, UK: 1998 to 2018, December 2019, table 1
20 Spring Budget 2020: Background briefing
have GDP per capita figures above the UK average (£32,000), with London significantly pulling up the UK figure. There is much less variation among other regions and nations. In 2018, most had GDP per head between £25,000 and £30,000. The North East (£23,600) and Wales (£23,900) had the lowest GDP per head of the UK’s 12 regions and nations.
GDP and GDP growth in UK regions and nations since 1998 GDP and % change in real* GDP per head over time period shown
% total change in real* GDP GDP per GDP/head over time period (£bn), head (£), 2018 2018 1998-2007 2010-2018 North East 63 23,569 30.9 2.4 North West 207 28,449 28.9 10.6 Yorkshire & Humber 142 25,859 26.6 8.9 East Midlands 125 25,946 17.8 8.3 West Midlands 160 27,087 16.1 14.8 East of England 186 30,069 22.8 13.3 London 487 54,686 34.8 16.6 South East 311 34,083 19.8 8.4 South West 158 28,231 19.9 7.3 England 1,839 32,857 25.6 12.0 Wales 75 23,866 22.0 11.9 Scotland 161 29,660 27.6 10.1 Northern Ireland 49 25,981 28.3 9.5 United Kingdom 2,140 31,976 ** 26.1 11.8
* Regional GDP data are not deflated using true regional price indices but by using industry deflators for the UK and applying to regional industry-level GDP **UK GDP per head figure excludes GDP that cannot be assigned to a region, this is mostly North Sea oil and gas extraction Source: ONS, Regional economic activity by GDP, UK: 1998 to 2018 , Dec 2019
Source: ONS, Regional gross domestic product all NUTS level regions, Dec 2019 The table above and chart below show real (inflation-adjusted) GDP per head growth rates. London saw the fastest GDP per head growth between 2010 and 2018, a cumulative increase of 16.6%, with the West Midlands second fastest at 14.8%. The UK average was 11.8%. The North East was an outlier, with growth per head of only 2.4% in total over the period. The next slowest was the South West at 7.3%. Taking a longer view, London also saw the fastest GDP per head growth over the period 1998-2018 with cumulative growth of 46%, followed by the North West at 39% and Scotland at 37%. The weakest growth- per-head performance was in the East Midlands at 23%. A clutch of regions – West Midlands, Yorkshire and the Humber, South West and South East – saw increases of 27-28%. The UK overall saw growth per head of 35%. 21 Commons Library Briefing, 5 March 2020
GDP per head growth highest in London over past 20 years Cumulative real GDP per head growth (%), 1998-2018
UK = 35.4% London North West Scotland East of Engl and North East Wales N.Ireland South East South West Yorks & Humber West Midlands East Midlands
0 10 20 30 40 50
Source: ONS, Regional gross domestic product all NUTS level regions, Dec 2019
3.2 Differences in productivity GDP is a measure of the value of economic output that takes place in each area, so will include the contribution of commuters who come to work in the region but live in a different region. Another key measure of economic performance that avoids these potentially distorting commuting issues is productivity. Productivity measures how much output (GDP) is produced per hour worked. Comparing regions and nations of the UK reveals London has the highest productivity level in the UK by some distance, but the gap is not as large as when looking at GDP per head. The South East is the only other region above the UK average. Wales and Yorkshire and Humber had the lowest productivity levels in 2018.
Productivity level in London higher than rest of UK Output per hour worked compared to UK average, 2018
UK ave London South East Scotland East of Engl and North West South West West Midlands East Midlands North East N.Ireland Yorks & Humber Wales
-20% -10% 0 +10% +20% +30% +40%
Source: ONS, Annual regional labour productivity dataset, Feb 2020
22 Spring Budget 2020: Background briefing
Regional figures such as these, while valuable, can also mask differences within regions, from local area to local area. The map below shows the same productivity data but this time for 371 local authorities in Great Britain (plus the overall figure for Northern Ireland). 43
43 Local authority data for Northern Ireland not available; ONS, Subregional productivity: labour productivity indices by local authority district dataset, 28 February 2020 23 Commons Library Briefing, 5 March 2020
The map illustrates how the differences within regions can sometimes be as large or larger than across regions. It highlights that many of the most productive local areas in the UK are in the South, mostly in London and the surrounding area to its west in the ‘M4 corridor’. There are also pockets of high productivity areas in other regions, such as around Warwick and Solihull in the West Midlands, and single areas, such as Cheshire East in the North West. The Office for National Statistics (ONS) who publish the statistics, make the following observations about this local data: In many cases, local authorities with relatively high labour productivity will be those with either a major manufacturing site (for example, car or aerospace production), a large utilities sector, or a focus on high-skill service sectors, reflecting the high labour productivity in these types of industries. Meanwhile, local authorities with the lowest productivity are typically in more rural or geographically isolated locations. 44 They go on to say that differences in productivity across the country are not just a result of industry structure but also more wide-ranging factors. The Industrial Strategy Council, tasked with evaluating government’s progress in delivering the aims of the Industrial Strategy, has pointed to three “key explanations” for productivity differences: • Place-based fundamentals: Geography, local culture, governance and infrastructure are important factors determining the economic activities of a region • Agglomeration: Places attract clusters of economic activity which become self-sustaining. These agglomeration effects arise because specialised firms benefit from the ability to trade with other firms in their industry and because these firms benefit from sharing the common resources offered by large cities. • Sorting: Workers, especially highly-skilled workers, also choose to cluster. This means small initial differences between places can generate large disparities in the nature and skills of the workforce, which then shape regions’ industries, attractiveness and productivity. 45 Andy Haldane, chair of the Council and chief economist at the Bank of England, noted in the report’s foreword that regional differences have deep roots and are difficult to tackle: Regional differences typically have deep roots and are long- lasting. They emerge in an evolutionary fashion due to the complex interplay of various factors acting in a self-reinforcing cycle - transport, education, skills, innovation, housing, civic and community infrastructure. For well-performing places, this is a virtuous circle. For left-behind places, it is a vicious one. Past experience suggests that closing these differences, or reversing those vicious cycles, takes time. There is a rarely a simple or singular policy means of doing so. But the evidence also clearly suggests that reversing the cycle of stagnation is possible provided
44 ONS, Subregional productivity in the UK: February 2020, 28 February 2020 45 Industrial Strategy Council, UK Regional Productivity Differences: An Evidence Review, 4 February 2020
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policy measures are large-scale, well-directed and long-lived. Historically in the UK, none of these conditions has been satisfied. 46
3.3 Household incomes The indicators focused on above relate to measures of economic output. Also of interest, and probably a better guide of living standards, are people’s income. At face value, these also show a similar regional picture: median earnings are highest in London, well above the UK average. 47 Digging a little deeper, however, leads to a more nuanced picture. A more complete evaluation should look at disposable (after-tax) income and include other income in addition to wages (investment income, welfare payments, pensions etc.). 48 A detailed survey of household disposable income, adjusted for the number of people living in each household, conducted by the Department for Work and Pensions (DWP) provides arguably the most rigorous data. 49 These figures are available on a before and after housing costs basis for the regions and countries of the UK. On a before housing costs basis, London has the highest median disposable income, although the difference is not as large as for GDP per head and productivity data (this is partly due to the tax system redistributing income). After housing costs, however, London drops to equal fifth highest, reflecting the sharply higher housing costs in the capital.
Household incomes depend greatly on whether housing costs are included £ per week, median household dispoable income (equivalised*), 2015/16-2017/18
Before housing costs After housing costs 600
500
400
300
200
100
0 Lon SE E Eng SW Scot E Mid Yorks W Mid NW NI NE Wal * Household incomes adjusted for number & age of people in household - data based on couple with no kids
Source: DWP, Households below average income, March 2019
46 Ibid. 47 Commons Library briefing paper, Average earnings by age and region, October 2019 48 Resolution Foundation, Mapping gaps: Geographic inequality in productivity and living standards, July 2019 49 DWP, Households below average income (HBAI) statistics, May 2019 25 Commons Library Briefing, 5 March 2020
3.4 Regional economic development policy To provide context to the debate on regional economic inequality and the Government’s “levelling up” agenda, this section provides background information on the past two decades of regional development policies. Labour Government: 1997-2010 Regional Development Agencies (RDAs) formed the cornerstone of regional economic policy under Labour between 1997 and 2010. Labour’s 1997 election manifesto included the pledge to “establish one- stop regional development agencies to co-ordinate regional economic development, help small business and encourage inward investment.” 50 The December 1997 White Paper, Building Partnerships for Prosperity, set out proposals to establish nine Regional Development Agencies in England. The White Paper also referred to the basis of regional policy in the 1960s and 1970s, arguing regional policy should aim toward improving the economic performance nationally, rather than merely alleviating local problems, with the introduction stating: The regional economies are the building-blocks of a prosperous economy, affecting the performance of the UK as a whole. Wide variations in levels of economic activity – reflected in wage pressures, levels of unemployment and movements in house prices – make the task of providing a stable macroeconomic climate more difficult. 51 Between 1999 and 2000, nine RDAs were established, covering all regions of England. RDAs had five statutory purposes: • To further economic development and regeneration • To promote business efficiency, investment and competitiveness • To promote employment • To enhance development and application of skill relevant to employment • To contribute to sustainable development RDAs were funded by a Single Budget or “single pot”, which was composed of contributions from six government departments. See table below for annual RDA funding levels between 1999/00 and 2011/12.
50 Because Britain Deserves Better, Labour Party manifesto 1997 51 Department for Environment, Transport and the Regions, Building Partnerships for Prosperity: Sustainable Growth, Competitiveness and Employment in the English Regions, December 1997, Cm 3814, p11
26 Spring Budget 2020: Background briefing
Total RDA funding, 1999/00 - 2011/12 (£ billion) 1999/00 0.6 2000/01 1.0 2001/02 1.3 2002/03 1.6 2003/04 1.8 2004/05 1.9 2005/06 2.3 2006/07 2.3 2007/08 2.3 2008/09 2.2 2009/10 2.3 2010/11 1.6 2011/12 0.7
Total 21.9 Sources: HC Deb 17 Dec 2007: Column 1076W HC Deb 14 Jun 2011: Column 778W
Since 2010 Current regional economic policy is largely a continuation of that started by the 2010-15 Coalition Government, which was based on the agenda of “localism.” The Conservative Party’s 2010 manifesto spoke of the existence of continued regional imbalances, in spite of the existence of RDAs: Too many areas of the UK lack a vibrant private sector and are too dependent on public spending. These regional imbalances have got worse over the last decade, despite billions of pounds spent by the Regional Development Agencies (RDAs). Our aim is to increase the private sector’s share of the economy in every part of the country by boosting enterprise and creating a better business environment. 52 The Coalition’s regional development policy was set out in the October 2010 White Paper Local Growth: Realising Every Place’s Potential. This outlined plans to abolish RDAs and argued that a successful regional growth strategy should entail “shifting powers away from central government” in favour of local communities, “rebalancing” the economy in regions that had become reliant on public sector employment, and using comparatively small amounts of public spending to help stimulate private sector growth. Many of the paper’s specific proposals and initiatives were first mooted in the May 2010 Coalition Agreement between the Conservatives and Liberal Democrats and the June 2010 Budget. Specific regional initiatives currently in operation include:
52 Conservative Party Manifesto 2010, p23 27 Commons Library Briefing, 5 March 2020
Local Enterprise Partnerships (LEPs) Locally owned strategic partnerships of local business and civic leaders. They are designed to determine specific local economic priorities and promote growth, employment and infrastructure development. They cover much smaller areas than RDAs – there are 38 covering all areas of England. The June 2013 Spending Review saw the Government ask LEPs to develop multi-year local Strategic Economic Plans, which would then be used for negotiations on Growth Deals with the Government, with LEPs awarded funding to deliver locally determined priorities for growth. As of October 2018, £9.1 billion worth of growth deal funding has been allocated to LEPs. Growth Deals funding allocates funding previously managed by central government departments. 53 The 2018 Budget confirmed that a number of areas outside of England would, for the first time, be granted growth deals. City Deals Bespoke packages of funding and decision-making powers negotiated between central government and local authorities and/or Local Enterprise Partnerships and other local bodies. Between July 2012 and August 2014, 26 city deals were agreed covering cities in England – a National Audit Office (NAO) study concluded the combined value of government investment in these deals was up to £3.8 billion over 30 years. Since 2014, five deals have been agreed for cities in Scottish cities and two for cities in Wales; a further three deals are currently being negotiated – one in Scotland and two in Northern Ireland. Enterprise Zones These are geographically defined areas, in which commercial and industrial businesses can receive incentives to set up or expand. Businesses locating to an Enterprise Zone before 31 March 2018 were entitled to a business rate discount of up to 100% over a five-year period (worth up to £275,000 per business) as well as Enhanced Capital Allowances for the purchase of machinery and equipment. There are currently 44 Enterprise Zones in England. Similar policies have been adopted by devolved administrations in Scotland and Wales: four Enterprise Areas spread across 15 sites are operational in Scotland, while seven Enterprise Zones are operational in Wales. A pilot scheme is operating in Northern Ireland. Regional Growth Fund Now discontinued. This was created in June 2010, with the aim of promoting the private sector in areas in England most at risk of public sector cuts by providing financial support for private enterprises to leverage additional funding and create sustainable jobs. Six funding rounds were held between 2010 and 2016.
53 National Audit Office, Local Enterprise Partnerships, HC 887, March 2016, pg. 20
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3.5 Further information Additional statistics, analysis and commentary on regional economic inequalities is available in these publications: • Commons Library briefing paper, Regional and National Economic Indicators, February 2020 • Industrial Strategy Council, UK Regional Productivity Differences: An Evidence Review, February 2020 • Resolution Foundation, Mapping gaps: Geographic inequality in productivity and living standards, July 2019 • Speech by Andy Haldane, chief economist at the Bank of England, Is all economics local?, May 2019 • ONS, Understanding spatial labour productivity in the UK, May 2019 • ONS blog post, Mind the gap: why the UK might not be the most regionally unequal country, November 2018 • IMF, United Kingdom: Selected Issues, includes analysis of regional disparities, February 2018 • OECD, Economic Survey of the UK, includes analysis of regional productivity differences, October 2017 29 Commons Library Briefing, 5 March 2020
4. The public finances
Summary Government borrowing has decreased from the peaks reached following the 2007-2008 financial crisis and is now at a more typical level. Government borrowed £38 billion in 2018/19 to make up the difference between its spending and the income it raised from taxes and other sources. At 1.8% of GDP, this was below the average for the past 70 years. Borrowing is likely to increase in the coming years. The Government wants an “infrastructure revolution” and is willing to borrow to pay for it, particularly at a time when it’s cheap for the Government to borrow. While the Government’s borrowing situation has improved, its debt – broadly speaking the stock of past borrowing – remains high. Public sector net debt at the end of 2018/19 was equivalent to 81% of GDP. The debt-to-GDP ratio was last consistently above 80% in the mid-to-late 1960s, when it was still recovering from reaching over 200% of GDP during World War II. Despite significant increases in debt, the Government’s debt interest costs have remained relatively low. Markets are prepared to lend to the Government at historically low rates.
4.1 Government borrowing (the deficit) When the Government spends more than the revenue it raises from taxes and other sources, it must borrow. In 2018/19, the Government borrowed £38 billion to fund part of its spending. 54 The borrowing is sometimes referred to as the budget deficit.
When total spending is higher than revenues, government has a deficit and must borrow, % GDP
50% Spending 40% OBR's Mar '19 30% Revenues Borrowing/deficit restated 20% forecast Surplus 10% 0% '90/91 '94/95 '98/99 '02/03 '06/07 '10/11 '14/15 '18/19 '22/23 12%
9% Public sector 6% net borrowing OBR's Mar '19 restated 3% forecast
0%
-3% '90/91 '94/95 '98/99 '02/03 '06/07 '10/11 '14/15 '18/19 '22/23
54 Data in this section are from ONS’ public sector finances or the OBR’s economic and fiscal outlook – March 2019, unless stated. All data exclude public sector banks.
30 Spring Budget 2020: Background briefing
Borrowing has fallen significantly since 2010… Government borrowing peaked at 10.2% of GDP in 2009/10, following the 2007-2008 financial crisis, but is at a more typical level now. Borrowing in 2018/19 is equivalent to 1.8% of GDP, which is below the average for the past 70 years and is the lowest level since 2001/02. …but is increasing in 2019/20 According to provisional figures, the Government borrowed 15% more in the first 10 months of the current financial year (2019/20) than during the same period of the previous year. 55
Borrowing in the first ten months of 2019/20 has been 15% higher than during the same period of 2018/19 Cumulative public sector net borrowing, £ billion
60 OBR's restated Mar '19 forecast 50 40 2019/20 30 2018/19 20 10 0 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
There is plenty of uncertainty about the ONS’s provisional figures (parts of which are based on forecasts), but it looks like full financial year borrowing will be higher in 2019/20 than in 2018/19. If borrowing turns out to be higher in 2019/20 than in 2018/19 it won’t be unexpected. In fact, the provisional data points to a smaller increase than the OBR previously forecast. The OBR forecast an increase of 24% in its March 2019 restated forecast. Performance in the final two months of 2019/20 will have to be particularly poor for borrowing to increase by quite this magnitude. 56
Box 4.1: The OBR’s March 2019 Borrowing is 0.7% of GDP higher, in 2018/19, restated forecast following ONS accounting changes In September 2019 the Office for National Public sector net borrowing, % GDP Statistics (ONS) made significant revisions to government borrowing statistics. 12% The revisions were a result of accounting 10% changes (most notably for student loans) and 8% a correction to an error in corporation tax 6% After revisions receipts. 4% The OBR has since restated its March 2019 2% Before revisions forecasts to be consistent with the ONS’s 0% revisions. 57 We use the restated figures in -2% this briefing. The OBR’s restated forecast also 1997/98 2002/03 2007/08 2012/13 2017/18 2022/23 discusses the changes made by the ONS in more detail.
55 OBR. Commentary on the Public Sector Finances: January 2020, 21 February 2020 56 ibid 57 OBR. Restated March 2019 forecast, November 2019 31 Commons Library Briefing, 5 March 2020
How might the borrowing forecast change? The OBR’s last forecast was in March 2019, nearly a year ago, and these figures have since been restated to allow for significant statistical revisions (see Box 4.1). It’s very difficult to predict precisely how the OBR’s forecast for borrowing might change in its Budget forecast, but it seems likely that borrowing will rise. Several issues are likely to affect the OBR’s forecast, relative to the restated March 2019 forecast. Spending Round 2019. As discussed in section 6.1, £13 billion of additional spending was announced for departments in 2020/21. The Conservative manifesto. The Conservative manifesto included day-to-day spending and tax measures which, taken together, increase current borrowing by a little over £1 billion in 2020/21 and lower it by a little under £1 billion in 2022/23 and 2023/24. 58 These figures only cover those pledges or ambitions that were given a cost. Allowing more borrowing for infrastructure. The Conservative manifesto promises an “infrastructure revolution”. The Government’s proposed rules for managing the public finances allow it to spend around £20 billion more a year on infrastructure through borrowing. The manifesto allocated some of this spending to specific projects such as research and development, flood defences and repairing of potholes. 59 See section 7 for further information. The economic outlook has worsened. Most forecasters expect growth in 2020 to be lower than they did in March 2019. If the OBR take the same view, they are likely to lower their forecast for tax receipts overall. Government’s borrowing costs have fallen. Borrowing costs were already low in March 2019, but they have fallen further since. This is positive for government borrowing. It’s likely that the OBR will lower its forecast for government spending on debt interest, even if the Government borrows more (see Box 4.2). The lower costs are likely to outweigh the extra borrowing. Borrowing in 2019/20 is likely to be lower than forecast, although still higher than in 2018/19. The OBR might decide that some of this relative improvement will persist into the coming years. Taking these factors into account, the IFS estimate that the OBR’s borrowing forecast might be around £20 billion a year higher relative to its March 2019 restated forecast. 60 Of course, this estimate doesn’t consider any new announcements that the Chancellor makes in the Budget.
58 Conservative Manifesto 2019: costings document, November 2019 59 ibid 60 IFS. Meeting the new fiscal targets? 26 February 2020
32 Spring Budget 2020: Background briefing
Box 4.2: The forecast for government debt interest spending is likely to be lower Since March 2019, Government’s borrowing costs have fallen. This will be reflected in the OBR’s forecast for government spending on debt interest. The interest rate at which the Government can borrow through the markets (in the form of Gilts) has fallen since March 2019. This means that the Government’s new borrowing, including debt being rolled over, can be financed at lower rates of interest than the OBR previously expected. Expectations over the Bank of England’s interest rate (bank rate) have also changed. This is important as the bank rate is the effective interest rate paid on nearly a quarter of government debt (due to the debt being held by the Bank of England). In March 2019, markets expected the bank rate to rise slowly. Markets now expect the Bank of England to lower the bank rate and it is these expectations that the OBR use in their forecast. The interest paid on some government debt varies with inflation. The Resolution Foundation note that lower than expected inflation will also decrease the OBR’s forecast for spending on debt interest. Taken together, lower borrowing costs are likely to outweigh any extra interest paid on new government borrowing.
4.2 Current budget deficit The current budget deficit is the difference between government current spending 61 – day-to-day spending on areas such as the running of public services and welfare payments – and government income from taxes and other sources. Unlike public sector net borrowing, the current budget deficit doesn’t include investment spending and therefore is said to measure the degree to which taxpayers meet the cost of paying for the services they receive. The current budget was in surplus in 2018/19… The current budget was in surplus in 2018/19 by £5.8 billion, equivalent to 0.3% of GDP. This means that the Government raised more from taxes and other revenues than it spent on its day-to-day spending. …and might be in 2019/20 While the outcome isn’t yet certain, the Institute for Fiscal Studies (IFS) expect that there will be a small current budget surplus in 2019/20. 62 A current surplus must be recorded in the final two months of 2019/20 for a surplus to be reached across the entire financial year. The provisional figures suggest that a surplus of £7 billion is required over February and March 2020. This is achievable. An average surplus of £9 billion was recorded in the final two months of the previous three financial years. The Conservative manifesto says the current budget should be in balance in three years’ time The Conservative manifesto says that the current budget should be in balance three years from now. This rule for managing the public finances – which hasn’t yet been officially adopted – is discussed, along with the other rules, in section 5 of this briefing.
61 Including depreciation 62 IFS. Meeting the new fiscal targets? 26 February 2020 33 Commons Library Briefing, 5 March 2020
The target year is currently 2022/23 (although it will roll forward each year, always focusing on the third year of the forecast). Think-tanks, such as the IFS and Resolution Foundation, agree that meeting this target leaves little space for the Chancellor to announce extra day-to- day spending, or tax cuts, without raising taxes elsewhere. The IFS project a current budget deficit of around £3 billion in 2023/23, while the Resolution Foundation estimate a surplus of around £10 billion (see section 5.3). 63 Either way, these figures both show that sticking to the rule places a real constraint on the Chancellor, particularly considering the uncertainty inherent in the forecasts. Revisions to forecasts are inevitable and often large, so Chancellors often build some contingency for meeting their particular target.
When current spending is higher than revenues, the government has a current budget deficit, % GDP
50% Current spending* 40%
30% Revenues OBR's Mar '19 Current budget deficit 20% restated Current budget surplus forecast 10% 0% '90/91 '94/95 '98/99 '02/03 '06/07 '10/11 '14/15 '18/19 22/23
10% 8% 6% Current budget defict 4% OBR's Mar '19 restated 2% forecast 0% -2% -4% '90/91 '94/95 '98/99 '02/03 '06/07 '10/11 '14/15 '18/19 22/23 * current spending including depreciation
4.3 Government Debt Public sector net debt is the overall level of government indebtedness, built up over many years. Broadly speaking, it is the stock of borrowing arising from past budget deficits. The debt-to-GDP ratio remains high… Before the 2007-2008 financial crisis, public sector net debt was around 34% of GDP. Following the crisis, debt increased sharply. The debt-to- GDP ratio was over 80% of GDP at the end of 2016/17, 2017/18 and 2018/19. The last time debt was higher than this was in the mid-to-late
63 ibid; Resolution Foundation. The trillion-pound question. Spring Budget 2020: pre- Budget analysis, 24 February 2020
34 Spring Budget 2020: Background briefing
1960s, when it was still recovering from reaching over 200% of GDP during World War II. 64, 65 …but has started to fall At the end of each quarter since Q1 2018, the debt-to-GDP ratio has been smaller than the same quarter of the previous year. This has been the case for the past seven quarters. Public sector net debt includes the impact of some temporary measures taken by the Bank of England following the EU referendum result. As the impact is largely temporary, the ONS and OBR have published a measure of public sector net debt that excludes the Bank of England from the headline measure. Under this measure the debt-to-GDP ratio has been lower, relative to the year before, in each quarter since Q4 2015.
Public sector net debt is forecast to fall over the forecast Public sector net debt (PSND), % GDP
90% PSND 80% 70% 60% PSND 50% (excluding Bank of England) 40% 30% 20% 10% 0% '90/91 '94/95 '98/99 '02/03 '06/07 '10/11 '14/15 '18/19 '22/23
The headline debt-to-GDP ratio should continue to fall… Even if the Government adds further to its debts, by borrowing more than is currently forecast, it looks like the headline measure of the debt- to-GDP ratio (which includes the Bank of England) will be lower by the end of this Parliament than at the start of it. The debt-to-GDP ratio will fall so long as government’s stock of debt grows slower than the economy, as measured by GDP. The inclusion of the Bank of England in this measure is significant here. Following the EU referendum result, the Bank of England announced measures to support the economy, including the Term Funding Scheme (TFS). When commercial banks pay back the loans the Bank of England made to them through the TFS, their payments will lower public sector net debt. In March 2019, the OBR forecast that repayments from the TFS would lower public sector net debt by 2.2% of GDP in 2020/21 and 2.9% of GDP in 2021/21.
64 OBR. Public finances databank, February 2020 65 The OBR has produced a summary of post-World War II debt reduction 35 Commons Library Briefing, 5 March 2020
…but underlying debt may rise The debt-to-GDP ratio excluding the Bank of England is less likely to be lower at the end of the Parliament, particularly if the Government does indeed increase borrowing by around £20 billion a year. 66 Government’s spending on debt interest has remained relatively low The Government’s debt interest costs have remained low, relative to its level of debt. The Government has been able to borrow at historically low interest rates (see section 5.2) and has benefited from the Bank of England owning more than one fifth of its debt. The effective interest rate paid on the debt held by the Bank of England is lower than would be paid if the debt were owned by the private sector. Box 4.2 discusses how borrowing costs have got even lower over the past year. The OBR is likely to lower its forecast for government debt interest spending, even if the Government adds to its stock of debt.
Despite significant increases in its debt, the government's debt interest costs have remained relatively low
4% Government debt as % of GDP 100% Government debt interest as % of GDP (right hand axis) 90% (left hand axis) 80% 3% 70% 60% 2% 50% 40% 30% 1% 20% 10% 0% 0% 1990/91 1995/96 2000/01 2005/06 2010/11 2015/16
66 IFS. Meeting the new fiscal targets?, 26 February 2020
36 Spring Budget 2020: Background briefing
5. New rules for the public finances
Summary Since the late 1990s, UK governments have adopted rules or targets to guide their management of the public finances. Such rules are often described as ‘fiscal rules’ and they normally focus on how much the Government can borrow or how it wants to manage its debt. At the Budget, the Chancellor will propose new rules to replace the current fiscal rules, which the Johnson Government inherited. The 2019 Conservative manifesto proposes a set of rules that are looser than the current set. The proposed rules will allow the Government to borrow more for spending on infrastructure such as roads, buildings and other assets, but will restrict the Government’s ability to borrow for day-to-day spending on public services. The new rules will be officially adopted once Parliament approves them. In its forecast the OBR will assess whether the newly proposed fiscal rules, and those currently in force, are being met. The rule which restricts borrowing for day-to-day spending on public services says that the current budget should be in balance in three year’s time (2022/23). This would mean that government’s revenues, from taxes and other sources, must cover government’s day-to-day spending on areas such as providing public services and welfare payments. It looks as though this rule gives the Chancellor little room to announce additional day-to-day spending, or tax cuts, without raising other taxes.
In this section we explain the rules set out in the Conservative manifesto and how constraining they may be. We also explain why new rules are being proposed.
5.1 A new set of rules Government’s New rules proposed in the manifesto management of the public finances The 2019 Conservative manifesto sets out new rules which were also (including how detailed alongside the Queen’s Speech. The rules are: 67 much it spends, • to have the current budget in balance no later than the third year taxes, borrows and of the OBR’s forecast period; how it manages its debt) is often • to limit public sector net investment to an average of 3% of GDP; known as its fiscal and policy. Fiscal rules • to reassess plans in the event of a pronounced rise in interest rates are adopted by taking interest costs above 6% of government revenue. governments to guide their fiscal The manifesto also says that the rules mean that “debt will be lower at policy. the end of the Parliament”. 68
67 HM Government, Queen's Speech December 2019: background briefing notes, 19 December 2019, page 131 68 Conservative Manifesto 2019, November 2019 37 Commons Library Briefing, 5 March 2020
The proposed rules are looser than the current set (see Box 5.1). The objective of eliminating the budget deficit is gone and the Government will be able to borrow for investment spending. The Institute for Government (IfG) – a think tank – estimates that these rules allow the Government to borrow more annually than the average for each year between 1948 and the start of the 2007-2008 financial crisis. 69 Since Rishi Sunak was appointed Chancellor there has been speculation that he may amend the rules to make them looser still, which will (at least to some extent) see them differ from those in the Conservative manifesto. Box 5.2 discusses some possible ways in which the new Chancellor may depart from the manifesto’s rules. Below, we focus on the rules set out in the Conservative manifesto. A current budget balance For the current budget to be in balance government’s revenues, from Proposed rule: taxes and other sources, must cover government’s day-to-day spending To have the on areas such as providing public services and welfare payments. If the current budget in current budget is in balance, the Government is not borrowing to fund balance no later its day-to-day spending. This was the case in 2019/20, as was explained than the third year in section 4.2. of the OBR’s forecast period The target is rolling and applies to the third year of the OBR’s forecast period. This means that at the upcoming Budget, when the OBR assesses the rule, they will be looking at whether it is met in 2022/23. Once we move into 2020/21 the target date will roll on and the OBR will assess whether the target is being met in 2023/24.
Current budget deficit, % GDP
8%
6% OBR 4% restated Mar '19 2% forecast
0%
-2% 1990-91 2000-01 2010-11 2020-21 Source: OBR. Public finances databank [accessed on 15 January 2020]
69 IfG. Conservative and Labour fiscal rules would shake off the spending straitjacket, 25 November 2019
38 Spring Budget 2020: Background briefing
Limiting public sector net investment to 3% of GDP Public sector net investment measures government’s net capital Proposed rule: spending on infrastructure such as roads, buildings and other assets. to limit public The proposed fiscal rules place a limit on public sector net investment of sector net 3% of GDP, on average. investment to an The rule will actually allow the Government to increase investment average of 3% of spending. In 2018/19, net investment was £44 billion which is GDP equivalent to 2% of GDP. An additional £20 billion could have been spent before the 3% of GDP limit was reached. Net investment last averaged 3% of GDP, over a five-year period in the late 1970s / early 1980s.
Public sector net investment, % of GDP
4%
Public sector net investment 3% 3% limit
2% OBR restated 1% Mar '19 forecast 0% 1990-91 2000-01 2010-11 2020-21 Source: OBR. Public finances databank [accessed on 15 January 2020] Interest costs below 6% of government revenue This rule focuses on government spending on debt interest (which is the Proposed rule: total amount of interest the Government pays out on its debt) relative to reassess plans in 70 to the revenue government raises from taxes and other sources. The the event of a rule allows the Government to reassess its plans, particularly for pronounced rise in investment spending, if interest rates increase. In 2018/19, debt interest interest rates taking was 4.6% of government revenues. It last went over 6% of government interest costs revenues in 2011/12. above 6% of government It isn’t certain which measures of debt interest and government revenue revenues the fiscal rule will focus on. In this briefing we assume that the rule targets government’s net debt interest payments relative to total public sector current receipts. The Government could instead choose to focus on gross debt interest payments, which is higher than the net measure as the net debt measure benefits from some debt being held by the Bank of England, which is within the public sector. 71 The Government could just focus on central government, in which case it would use measures of debt interest and revenues that exclude local government and public corporations.
70 Resolution Foundation. Playing by their own rules?, 28 November 2019 71 For more on this, see the box Gross debt and net debt interest in the Library briefing Government borrowing, debt and debt interest: historical statistics and forecasts. 39 Commons Library Briefing, 5 March 2020
Government debt interest as % of government revenues
10% OBR 8% Mar '19 forecasts 6% 6% trigger 4%
2%
0% 1990-91 2000-01 2010-11 2020-21 Source: OBR. Public finances databank [accessed on 15 January 2020]
Box 5.1: The current fiscal rules (in force since January 2017) What are the rules? In short, the Government has an objective to run a balanced budget by 2025/26. This means that from 2025/26, government revenues should be large enough to cover all public spending, including investment spending. If this is the case, there is no budget deficit. To aid it in reaching its fiscal objective, the Government has a fiscal mandate: • to reduce borrowing adjusted for the economic cycle to below 2% of GDP by 2020/21 and a supplementary debt target: • for public sector net debt as a % of GDP to be falling in 2020/21 It also has a further rule for welfare spending: • spending on welfare in 2021/22 to be contained within a cap and margin set by the Treasury at Autumn Statement 2016. The Library briefing The welfare cap has more on this target. The Treasury can review the appropriateness of the fiscal targets if it deems there to have been a ‘significant economic shock to the UK economy’. Section 3 of the Library briefing The Office for Budget Responsibility and Charter for Budget Responsibility discusses the current rules further. Are they being met? At the March 2019 forecast the OBR said that the Government was unlikely to run a balanced budget by 2025/26 but was on course to meet its other fiscal rules. 72 However, revisions made by the ONS (see Box 4.1) and increases in spending in 2020/21 – announced in the Spending Round (see section 6.1) – mean that it now looks less likely that the fiscal mandate will be met in the OBR’s Budget forecast. 73 The OBR’s restated March 2019 forecast (which incorporates ONS accounting changes) puts the borrowing adjusted for the economic cycle at 1.7% of GDP, only 0.3% points below the 2% of GDP target. The additional spending announced in the Spending Round is equivalent to over 0.5% of GDP. The OBR are likely to judge that the Government remains on course to meet the debt target, as explained in section 4.3.
72 OBR. Economic and fiscal outlook – March 2019, para 5.6 – 5.26 73 House of Commons Library. Office for Budget Responsibility and Charter for Budget Responsibility, January 2020, Box 3.1
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They must be agreed by the House of Commons The House of Commons must approve the proposed rules for them to officially replace the current rules. This seems likely, given the Government’s majority. The fiscal rules are part of the Government’s wider fiscal framework, which is set out in the Charter for Budget Responsibility (the Charter). At the Budget, the Chancellor will lay a revised Charter before Parliament for the House of Commons to approve. 74 The rules contained in the revised Charter will only become the official fiscal rules once the House of Commons has approved the document. The OBR will still report on progress against the current rules in their upcoming forecast, but it’s likely that they will also assess the proposed rules. In the past when the Government has been in the process of changing its fiscal rules the OBR has assessed both the rules in force and those proposed. 75 The Chancellor may choose to revise other parts of the Charter that deal with fiscal policy. 76 The Charter also covers the basic operation of fiscal policy (what should be in Budget reports, for example) and the overall policy for debt management and how debt management should operate. It also sets out how the welfare cap – a limit to the total amount government can spend on certain benefits – operates. The welfare cap may be dropped from the Charter. There was no mention of it in the Conservative manifesto. The welfare cap shouldn’t be confused with the household benefits cap which limits the amount individual households can receive. The Library briefing The welfare cap has more information on the cap.
5.2 Why are new rules being proposed? The Government has different priorities… The Government’s priorities are different to those of its recent predecessors. There is more emphasis on infrastructure spending and less on reducing the overall budget deficit. As we discuss in section 7, the Government intends to spend more on infrastructure. The previous Chancellor, Sajid Javid, said that the Government is willing to borrow more to invest “in policies that deliver real productivity gains and boost economic growth in the long term” and to “level up” across the country. He also said that the low cost of government borrowing, and reductions in the budget deficit, mean that the Government can afford to borrow to invest. 77
74 HC Deb. 20 January 2020: c46 75 For example, in the July 2015 forecast the OBR reported on both the existing fiscal rules and new ones proposed in a revised draft Charter that was published alongside the July 2015 Budget. 76 HM Treasury. Charter for Budget Responsibility, Section 3, January 2017 77 Spending Round 2019: Chancellor Sajid Javid's speech; HM Government. Queen's Speech December 2019: background briefing notes, page 132 41 Commons Library Briefing, 5 March 2020
The rate at which government can borrow is at historic lows Ten-year government bond yields, %
20%
15%
10%
5%
0% 1960 1970 1980 1990 2000 2010
Note: Averages of daily interest rates implied by the prices at which the government bonds traded in financial markets Source: OECD. Long-term interest rates The targets for reaching a current budget balance and controlling debt interest payments are aimed at keeping “borrowing and debt under control”. The Conservative manifesto says that the rules will mean that debt will be lower at the end of the Parliament. 78 The current budget balance rule will limit the amount of day-to-day spending, or tax cuts, that the Government can borrow for. The debt interest target is designed to control investment spending. If borrowing costs rise and debt interest rises above 6% of revenues, then the Chancellor would re- assess how much was being borrowed for investment spending. 79 …and the current official rules end in 2020/21 Both the current official borrowing and the debt targets will soon become obsolete, as they have target dates of 2020/21. Box 5.1 explains that the OBR’s forecast may show that current borrowing rule is being missed in 2020/21.
Box 2.2: What if the Chancellor wanted looser rules? There has been speculation that Rishi Sunak may depart from the manifesto’s fiscal rules. The rules were set by his predecessor as Chancellor, Sajid Javid, and Mr Sunak may want to be able to borrow more, particularly for day-to-day spending. The proposed fiscal rules were included in the Conservative manifesto. If the Chancellor wants to make changes it seems more likely that he will adapt these rules, rather than making wholesale changes. It would be quite radical to significantly change rules set out in a manifesto less than 6 months ago. Both the IFS and Resolution Foundation caution that abandoning or significantly changing the rules might undermine the Government’s economic credibility and the credibility of any new rules. 80 This isn’t a universally accepted view, however. The director of the National Institute of Economic and Social Research, Jagjit Chadha, is critical of the manifesto’s rules. He says that the Government would be better off having a general objective for low and stable public debt, and then publishing forecasts that focus on borrowing excluding government debt interest (the primary budget balance – see Box 5.4). 81 If the Chancellor wished to adapt the manifesto’s rules without completely abandoning them, a potential option would be to change the target date for achieving a current budget balance. The
78 2019 Conservative Manifesto, November 2019 79 Sajid Javid’s speech at Manchester Airport, 7 November 2019 80 IFS Press Release, Raise taxes, entrench austerity or break a fiscal rule: the choice facing the new Chancellor, 26 February 2020; Resolution Foundation, The trillion pound question: Spring Budget 2020: pre-Budget analysis, 24 February 2020 81 Rishi Sunak should abandon arbitrary fiscal rules, FT, 22 February 2020
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Resolution Foundation estimate that moving the target date to the fifth year of the forecast period (rather than the third) could allow for an “additional £5 billion of spending in 2024/25, relative to reaching a current balance in 2022/23”. The IFS say that moving the target date into the future is “not likely to be very helpful” as there would be “just as tight a situation with respect to the current budget”. 82 The Resolution Foundation also looked at moving to a measure of the current budget that allowed for the ups and downs of the economy (cyclically adjusted current budget). They concluded that while this might be desirable for an economic perspective – as it would allow the Government to stimulate the economy in the event of a slowdown – it wouldn’t provide much in the way of additional borrowing capacity now. An alternative could be to allow a balance within plus or minus 1% of GDP. This would allow for additional borrowing of around £20 billion but the Resolution Foundation conclude that “it would not be credible for the government to immediately aim for the bottom of the target range”. 83 There has been speculation that the Chancellor may widen the definition of what counts as investment spending to include some areas not currently included. For instance, public spending on developing skills is currently classed as day-to-day spending, but some argue it could be considered an investment in human capital. Changing the definition would help to lower the Government’s day-to-day spending. The official public finance statistics, compiled by the ONS, follow international guidelines and accounting procedures. These generally say that investment spending is on fixed assets, not areas such as human capital. However, this doesn’t prevent the Treasury from creating its own measure if it so wanted. An alternative to changing definitions might be to simply change the fiscal rule to exclude some day-to-day spending.
5.3 How constraining are the new rules? The investment rule shouldn’t limit the Government’s infrastructure ambitions The Government can significantly increase investment before it meets the 3% of GDP limit. Public sector net investment hasn’t averaged over 3% of GDP since the late 1970s / early 1980s, when there were more publicly owned industries than now. Such industries required capital investment. The Government can spend around £20 billion more a year than currently planned and still be within the 3% limit. The Conservative manifesto sets out some projects that are to be funded through this additional borrowing capacity. The manifesto earmarks £3.2 billion of investment spending in 2020/21 and the annual amount rises to £8.1 billion in 2023/24. The largest amounts are for research and development (see section 7.3) and flood defences (see section 7.5), but there is also funding for various transport and environmental projects. 84 Even after accounting for these projects the Government will still have capacity to borrow an additional £10 billion for investment spending each year.
82 ibid 83 ibid 84 Conservative Manifesto 2019: costings document, November 2019, Table 6 43 Commons Library Briefing, 5 March 2020
Public sector net investment, % of GDP
Including 4% Manifesto Public sector net investment investment 3% 3% limit
2% OBR restated 1% Mar '19 forecast 0% 1990-91 2000-01 2010-11 2020-21
Balancing the current budget looks tight Based on the Government’s current spending and tax plans reaching a current budget balance will be challenging, particularly if the Chancellor wants to build in any contingency – or ‘headroom’ – for meeting the rule (see Box 5.3). The target will become more challenging if the Chancellor announces further increases in day-to-day public spending or tax cuts in the Budget. 85 In its restated March 2019 forecast, the OBR forecast a current budget surplus of £19 billion in the current target year of 2022/23. Looking at it today, this surplus seems high. Events since March 2019 have changed the outlook. Most significantly (as discussed in section 6) public spending has increased (largely through Spending Round 2019) and the outlook for the economy has worsened, which traditionally means lower tax revenues and higher welfare spending. On the positive side, government’s borrowing costs have fallen which means lower debt interest spending (see Box 4.2). The IFS and Resolution Foundation agree that taken together these items worsen the outlook for the current budget, relative to the OBR’s forecast of a £19 billion surplus. The Resolution Foundation expect a smaller surplus of £10 billion in 2022/23, which gives the Chancellor a relatively small ‘headroom’ against the current budget rule. The IFS project a current budget deficit of £3 billion, which would break the current budget rule. The National Institute of Economic and Social Research have also forecast a current budget deficit in 2022/23. 86 It isn’t surprising that think-tanks should end with different estimates for the 2022/23 current budget. Forecasts such as these are full of uncertainty and depend on the forecasters’ views of how factors will play out. The charts below explain how the IFS and Resolution
85 ibid; Resolution Foundation, The trillion pound question: Spring Budget 2020: pre- Budget analysis, 24 February 2020; IFS. Meeting the new fiscal targets?, 26 February 2020; IFG. Fiscal rules must not follow the chancellor out the door, 13 February 2020; IFG. Conservative and Labour fiscal rules would shake off the spending straitjacket, 25 November 2019 86 Arno Hantzsche and Garry Young, Prospects for the UK economy, in National Institute Economic Review volume 251, February 2020
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Foundation came to their respective estimates of the current budget in 2022/23.
Box 5.3: What is fiscal ‘headroom’? The difference between the latest forecast and the level of borrowing being targeted by a fiscal rule is often described as ‘headroom’ against the rule. It is the amount by which the forecast suggests that the rule is being met. Since 2010, successive Chancellors have kept a headroom of around £20 billion against their own borrowing rule to cushion them from changes in the uncertain forecasts. The OBR’s fiscal risks report includes an interesting discussion about how Chancellors have behaved to maintain headroom against their respective fiscal rules. 87
The Resolution Foundation project a current budget surplus of £10 billion in 2022/23 Estimated changes in 2022/23 current budget surplus, £ billion
15 10 5 0 £10bn -5 £19bn surplus -10 surplus -15 -20
-25 OBR Mar '19 Spending Social Manifesto Extra Revised RF's restated Round care pledges deprec- economic Feb'20 forecast 2019 funding iation forecast forecast Notes: Extra depreciation is calculated as the depreciation of the assumed extra gross investment using the 2018/19 depreciation rate. It also includes a small amount capturing the interest on the additional borrowing for the investment Source: Resolution Foundation. The trillion-pound question. Spring Budget 2020: pre- Budget analysis, 24 February 2020, Figure 9
The IFS project a current budget deficit of £3 billion in 2022/23 Estimated changes in 2022/23 current budget surplus, £ billion
15
10 £3bn 5 deficit 0
-5 £19bn -10 surplus -15 -20
-25 OBR Mar '19 Spending Manifesto Worse Debt interest Better IFS's restated Round pledges economic & stock borrowing Feb'20 forecast 2019 outlook market in 19/20 forecast
Source: IFS. Meeting the new fiscal targets?, 26 February 2020, page 12
87 OBR. Fiscal risks report – July 2019, July 2019, paragraphs 8.9 – 8.16 45 Commons Library Briefing, 5 March 2020
Debt interest rule The debt interest rule allows the Chancellor to re-assess his borrowing plans if “borrowing costs rise significantly in future”. It isn’t designed to be particularly constraining in the near term, so long as the economic and fiscal outlook doesn’t change greatly. On current projections, debt interest would need to be over 35% higher in 2023/24 to reach 6% of government revenues, assuming no change in the receipts forecast. Only if debt interest were £15 billion higher than currently forecast in 2023/24 (£42 billion) would the 6% level be reached. As discussed in Box 4.2 it’s likely that debt interest spending will be lower in the Budget forecast compared with the March 2019 forecast. Even if the Government borrows more, the lower cost of borrowing means that the forecast for debt interest spending is likely to be lower.
Box 5.4: Alternative ways of measuring government borrowing Borrowing rules can focus on different measurements of the Government’s budget. Below are some definitions for the most widely used measures internationally: Overall borrowing: the difference between total government spending and total government revenues from taxes and other sources. In the UK this is known as public sector net borrowing but is often referred to as the budget deficit. Current borrowing: the difference between government current spending – day-to-day spending on running public services, grants and administration – and government revenues from taxes and other sources. The current budget excludes investment spending. In the UK this is known as the public sector current budget deficit. Structural borrowing: estimates the size of borrowing that would be expected if the economy was running at a sustainable level of employment and activity – it adjusts for the ups and downs of the economy. Structural elements are the underlying or persistent part of borrowing, which are unrelated to the economic cycle. Further information on the structural balance is available in Box 2.3 of the Library briefing Autumn Budget 2018: Background briefing. In the UK this is often referred to as cyclically adjusted net borrowing. Primary borrowing: the overall budget balance excluding net interest payments. Glossaries of public finances terms are available from the ONS and the IMF.
5.4 Further information Section 3 of the Library briefing paper Office for Budget Responsibility and Charter for Budget Responsibility provides • more detail on the current fiscal rules • alternative rules proposed by Labour and think-tanks • previous UK fiscal rules • the effectiveness of fiscal rules • fiscal rules operating in other countries The OBR discuss the previous and current fiscal rules in their Fiscal risk report – July 2019 (paragraphs 8.9 – 8.16). The Resolution Foundation has been active on this issue recently. They have published the following since October 2019:
46 Spring Budget 2020: Background briefing
• The trillion-pound question: Spring Budget 2020 and the tension between higher spending, low taxes and fiscal credibility, 24 February 2020 • Playing by their own rules?, 28 November 2019 • Totally (net) worth it: The next generation of UK fiscal rules, 29 October 2019 • Britannia waives the rules. Lessons from UK and international experience with fiscal rules, 21 October 2019 Recent briefings and discussion from other think-tanks include: • IFS. Meeting the new fiscal targets?, 26 February 2020 • Tony Blair Institute. Whatever the Weather: Future-proof Budget Rules, 21 February 2020 • IFG. Fiscal rules must not follow the chancellor out the door, 13 February 2020 • IFG. Conservative and Labour fiscal rules would shake off the spending straitjacket, 25 November 2019 • IFS. Fiscal targets and policy: which way next?, 8 October 2019
47 Commons Library Briefing, 5 March 2020
6. Public spending: developments since March 2019
Summary The Spending Round in September 2019 set departmental spending limits for financial year 2020-21 ahead of a full multi-year Spending Review in 2020. These included several spending increases – for example in health and education – and no department saw a real-terms (inflation-adjusted) cut in its budget. Overall, departments’ spending in 2020/21 was increased by £13.4 billion in the Spending Round. The 2019 Conservative manifesto includes some smaller increases in day-to-day spending. It is possible that this Budget will set the overall spending envelope for the next few years covered by the upcoming Spending Review. Given the commitments that have already been made, and the promises made in the Conservative manifesto and the Queen’s Speech, several think tanks have suggested that it will be difficult for the Chancellor to increase spending in other areas while also keeping to his fiscal rules. Promised increases in investment spending are also likely to cause higher day-to-day spending. Leaving the EU will have its own consequences for spending. The Government will replace EU structural funding and agricultural funding. Most working-age benefits will increase by inflation in April 2020. This will be the first increase in such benefits since April 2015.
6.1 Spending announced since Spring Statement 2019 Spending Round 2019 and the next Spending Review Then-Chancellor Sajid Javid presented the Spending Round to Parliament on 4 September 2019. This set departmental budgets for 2020/21. A full multi-year Spending Review is set to follow at some point in 2020 (see below). Key announcements at the Spending Round The departmental allocations made at the Spending Round represented an increase of £13.4 billion in total spending over the projections given for 2020-21 at the 2019 Spring Statement. The Chancellor stated that the intention was that no department would see a real-terms (inflation- adjusted) cut in its day-to-day budget. Some of the major items of spending were as follows: • Confirmation of the previously announced five-year funding increase for the NHS, with annual budgets ending up £33.9 billion higher by 2023-24 than in 2018-19; • A funding increase for schools of £7.1 billion by 2022-23 compared to 2019-20 levels, representing a £4.6 billion real-terms increase;
48 Spring Budget 2020: Background briefing
• Per-pupil schools funding to rise in line with inflation (1.8% cent); • £750 million more for policing in 2020-21, in order to start the process of recruiting 20,000 additional police officers by 2023; • £1 billion for social care; • Further funding for Brexit preparations, with £2 billion allocated for 2020-21 to help with establishing a new relationship with the EU. Departmental settlements In percentage terms, the Law Officers’ Departments and the MHCLG’s 88 Local Government budget will receive the largest real-terms increase in 2020-21, at 12%. The budgets of three departments (the Foreign and Commonwealth Office, HMRC, and the Treasury) will be unchanged, in real-terms. 89
Changes to departmental budgets relative to 2019-20 baseline % change in RDEL excluding depreciation, 2019-20 to 2020-21, real terms
Law Officers' Departments +12% MHCLG - Local Government +12% Transport +11% Cabinet Office +7% Home Office +6% Small and Independent Bodies +5% Justice +5% Digital, Culture, Media and Sport +4% Education +3% Environment, Food and Rural Affairs +3% Health and Social Care +3% MHCLG - Housing and Communities +3% Single Intelligence Account +3% International Trade +2% Business, Energy and Industrial Strategy +2% Wales +2% Work and Pensions +2% Defence +2% Northern Ireland +2% International Development +2% Scotland +1% Foreign and Commonwealth Office 0% Exiting the European Union 0% HM Revenue and Customs 0% HM Tr eas ury 0%
0% 5% 10% 15% Source: HM Treasury, Spending Round 2019, statistical annex, 4 September 2019
All of these figures are for ‘RDEL excluding depreciation’, a spending total that represents the amount of money departments have available for day-to-day planned spending. Budgets for capital spending (longer- term investment) already cover 2020-21, and were therefore not covered in the Spending Round; projections for spending on demand-
88 Ministry for Housing, Communities and Local Government (MHCLG) 89 The Department for Exiting the EU was in the same position, but will no longer have any budget following its abolition on 31 January 2020. 49 Commons Library Briefing, 5 March 2020
driven services (such as welfare) are not included in the Spending Round totals and are expected to be announced at the Budget. The 2020 Spending Review The Government’s initial plan (as announced in the 2019 Spring Statement) had been to hold a full three-year Spending Review in 2019. This plan changed once it became clear that there would be a new Prime Minister, with the result that the 2019 Spending Review became a one-year Spending Round instead. 90 However, this does not mean that the full Spending Review was cancelled, merely postponed – the Government has said that “[a] full multi-year spending review will follow in 2020.” 91 The full Spending Review will cover at least the financial years 2021/22 and 2022/23, but may go further. 92 The Government has said that the 2020 Spending Review would “set out further plans for long-term reform”. This probably refers to several consultations and policy decisions which had been intended to take place alongside the Spending Review in 2019 – examples include the design of the UK Shared Prosperity Fund and the funding formula for the police grant. 93 If the Government wishes to keep to its current commitments – spending on the NHS and schools, maintaining obligations to spend on international aid and defence, and staying within fiscal limits – there will be very little room to manoeuvre on other areas of spending. A recent joint letter to departments from Boris Johnson and Sajid Javid reflects this by asking departments to find further savings of up to 5%. 94 The Institute for Government warned in a blog post on 30 January 2020 that these savings may be difficult to achieve, and that resources consumed by the Government’s other spending commitments (combined with the likely economic impact of Brexit) may mean that more and deeper cuts will be necessary to balance the books. 95 The Institute for Fiscal Studies came to a similar conclusion in February – it suggested that sticking to existing commitments and avoiding any further real-terms cuts in unprotected budgets would require an additional £3 billion by 2023-24. 96
90 For more on this, see the Library’s Insight post What’s happened to the 2019 Spending Review? 91 HM Treasury, Spending Round 2019, 4 September 2019 92 The Spending Round referred to a “multi-year” Spending Review taking place in 2020, but did not specify how many years it would cover. A more recent PQ response (PQ 9669) suggests that the Review will be for three years. 93 More details can be found in section 2.1 of the Library’s debate pack Police Grant Report (England and Wales), published in February 2019. 94 Financial Times, Johnson and Javid order budget cuts of at least 5%, 29 January 2020 95 Institute for Government, Five per cent spending cuts will be difficult to achieve, 30 January 2020 96 Institute for Fiscal Studies, Raise taxes, entrench austerity or break a fiscal rule: the choice facing the new Chancellor, 26 February 2020
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The Government looks set to increase its investment spending (see section 7). An article from the National Institute of Economic and Social Research points out that such capital investment will necessarily increase day-to-day costs (for example, building new hospitals will result in a higher wage bill due to recruiting more people to work in them), which will also have an impact on budget flexibility. 97 Spending announced in the Conservative manifesto and the Queen’s Speech A number of spending commitments were mentioned in the 2019 Conservative manifesto, some of which also then appeared in the Queen’s Speech in December 2019. Some of the largest for day-to-day spending were: • around £800 million a year for nurse recruitment, training and retention; • around £600 million a year, from 2021/22, for a National Skills Fund; • around £250 million a year, from 2021/22, for childcare In total, new announcements in the manifesto increase government’s day-to-day spending by around £3 billion a year, from 2021/22. The manifesto included some previously announced spending plans, such as an additional £1 billion a year for social care during this Parliament. The precise timescales for these funding commitments have not yet been announced; more detail may be forthcoming in the Budget. The manifesto also includes some capital projects. £3.2 billion of such spending is earmarked for 2020/21. The annual amount rises to £8.1 billion in 2023/24 (see section 5.3). Other spending The House of Commons has passed the NHS Funding Bill, which is intended to place the five-year funding plan for the NHS on a statutory footing. Although this has little legal effect (as the Government already had the power to set its own spending levels), it does confirm that the Government intends to stick to the announced levels of funding for the NHS. Further funding has also been promised to Northern Ireland to support the newly restored Northern Ireland Executive and Assembly. The exact amount that will be spent is still under discussion, but media reports suggest a total of around £1.5-2 billion. 98
6.2 Replacing EU funding after Brexit Organisations in both the public and private sectors in the UK receive funding from various EU programmes, which are now set to end when the transition period concludes (this is expected to happen at the end of
97 Arno Hantzsche and Garry Young, Prospects for the UK economy, in National Institute Economic Review volume 251, February 2020 98 See, for example, Financial Times, Northern Ireland leaders demand extra funding package, 13 January 2020 51 Commons Library Briefing, 5 March 2020
December 2020). In order to minimise disruption to these organisations, the Government has guaranteed all funding from these programmes for their full duration, so long as the funding arrangements were agreed before the UK left the EU. On 30 September 2019, then Chief Secretary to the Treasury Rishi Sunak confirmed that this guarantee would be funded by allocating £4.3 billion to departments and the devolved administrations for 2019/20. The full cost to the Treasury of this guarantee (if it is needed) would likely be around £16.6 billion. 99 Some replacements for EU funding have also been announced. Structural funding, which largely supports economic development and employment, will be replaced with the UK Shared Prosperity Fund. Details about the Fund have been scarce so far, but more information about its design and priorities are expected to be announced alongside the 2020 Spending Review. The Direct Payments to Farmers (Legislative Continuity) Act 2019-20 received Royal Assent on 30 January. 100 This Act allows agricultural payments to farmers to continue since the UK has left the EU.
6.3 The end of the benefits freeze Most working-age benefits and tax credit elements were subject to a four-year freeze covering the period 2016/17 to 2019/20. This followed a three-year period from 2013/14 to 2015/16 when annual increases were limited to 1%. In addition, specific freezes affected Child Benefit and certain tax credit elements during the period from 2011/12 to 2013/14. No such restrictions are proposed for 2020/21, meaning that these benefits will once again be uprated in line with inflation – this results in a 1.7% CPI-indexed increase in April 2020. The working-age benefits that were affected included: • Jobseekers’ Allowance • ESA personal allowances and work-related activity component • Income Support • Child and Working Tax Credit (non-disability-related elements) See our Benefits • Housing benefits: various allowances/premiums and LHA rates Uprating 2020 briefing (CBP-8806) • The equivalents of the above in Universal Credit for the full list of • Child Benefit measures to limit the Other working-age benefits, such as the ESA Support component uprating of working- age benefits since (payable to those with the severest work-limiting conditions), disability 2010. and carers’ benefits and statutory parental pay were unaffected. The four-year freeze The four-year freeze was announced in the 2015 Summer Budget as part of a package of welfare measures which were intended to save the Treasury £12 billion a year in total by 2019/20. The Government said that after 2008’s financial crisis most benefits had risen by 21%
99 HCWS1834, 30 September 2019 100 The Library has produced a briefing paper on this Bill.
52 Spring Budget 2020: Background briefing
compared to a rise in average earnings of 11% and that the freeze was necessary “to ensure it always pays to work”. 101 The freeze kept affected benefits and tax credits at the same cash amount as in 2015/16. If, instead of being frozen, benefits had been uprated in line with the September CPI rate, these payments would have been uprated by: • 0.0% in 2016/17 (CPI was -0.1% in the relevant period, so benefits would not have gone up anyway) • 1.0% in 2017/18 • 3.0% in 2018/19 • 2.4% in 2019/20. Cumulatively, if there had been no four-year freeze and affected benefits had been allowed to rise in line with CPI, affected benefits would have risen by 6.5% in nominal terms by 2019/20 compared with 2015/16. How much did the four-year freeze save the Treasury? The Office for Budget Responsibility (OBR) originally forecast that the Summer Budget welfare package would generate £12.5 billion of annual savings for the Treasury by 2019/20, including £3.9 billion of savings from the four-year freeze. 102 The OBR has recently revised these costings in light of subsequent changes in policy and forecasting assumptions. It now estimates that the four-year freeze saves the Treasury £4.1 billion in 2019/20, £0.3 billion more than the OBR’s original forecast (rounded). The higher estimate was due to inflation in 2016-2018 being higher than originally forecast, 103 an effect which was partially offset by higher-than-forecast earnings growth for families on Tax Credits. Conversely, the OBR revised its estimate of the overall savings generated by the Summer Budget 2015 welfare package downwards to £8.4 billion per year in 2019/20 (£4 billion lower than the original forecast). Although benefit rates won’t be frozen in April 2020, the four-year freeze will continue to generate savings for the Treasury. This is because the freeze has set increases in benefit expenditure on a permanently lower trajectory. In 2020/21 the freeze is forecast by the OBR to save £4.3 billion relative to the no-freeze baseline. The chart below shows the latest forecast for total welfare expenditure in the UK next financial year, as well as the estimated effect of the
101 Summer Budget 2015 para 1.137 102 OBR Welfare trends report December 2019 table 2.1. The Treasury separately estimated at Budget 2016 that the four-year freeze would save £3.5 billion annually by 2019/20 – see Budget 2016, red book table 2.2 line as. 103 In its March 2016 Economic and Fiscal Outlook (table 4.1), the Office for Budget Responsibility forecast that CPI inflation for uprating purposes would be 0.6% for 2017/18, 1.6% for 2018/19 and 2.1% for 2019/20. The actual figures for these years were 1.0%, 3.0% and 2.4% respectively. 53 Commons Library Briefing, 5 March 2020
Summer Budget 2015 welfare package (including the four-year freeze) on annual spend over the period 2015/16 to 2020/21.
UK social security expenditure 2015/16 to 2020/21 with OBR estimate of savings from the Summer Budget 2015 package of welfare measures
£ billion, nominal (cash) terms Policies announced at 250 Summer Budget 2015 take £9.1bn (4%) out of annual 200 spending by 2020/21, of which £4.3bn (2%) is due 150 to the ongoing effect of 223.0 227.3 232.2 the four-year freeze 100 216.2 217.3 220.1 Four-year freeze savings 50 Other SB 2015 savings Expenditure: actual/forecast 0 2015/16 2020/21 Source: OBR Welfare trends report December 2019, tables 1.1 and 2.6
The Summer Budget 2015 welfare package followed on from an array of welfare cuts and reforms implemented by the preceding Coalition Government between 2010 and 2015. The OBR estimated in 2016 that these lowered annual social security expenditure by £19.6 billion (8%) by 2015/16 and by £33.6 billion by 2020/21. 104 The latter figure should be treated with caution as it does not factor in the effect of changes occurring since 2016. Impact on individuals and families The blanket limits and freezes on working-age benefit and tax credit rates from 2013 onwards are unprecedented, at least in modern times. Overall, benefits and tax credits affected by the four-year freeze will be around 6% lower in 2020/21 than if CPI indexation had been applied See our Benefits during the four years of the freeze. Uprating 2020 briefing (CBP-8806) Taking account of all uprating restrictions across the decade, affected for more on how DWP benefits are around 9% lower in 2020/21 than if CPI indexation uprating freezes and limits have affected had applied since 2010. benefit and tax credit Child Benefit and Working Tax Credit elements are between 13% and amounts. 17% lower in 2020/21 than would have been the case if CPI indexation had applied throughout the decade. The Child Tax Credit child element is only 1.4% lower on this basis, however, because it received a large above-indexation increase in 2011/12. Although CPI uprating has resumed for 2020, unless benefits are uprated by more than inflation in future years, the result will be permanent real-terms reductions in benefit and tax credits rates.
104 OBR Welfare trends report October 2016, paragraph 4.14, page 59.
54 Spring Budget 2020: Background briefing
This has occurred in the absence of any published official research to establish whether existing benefit rates were sufficient to meet an acceptable minimum standard of living. 105 Research on ‘Minimum Income Standards’ (MIS) funded by the Joseph Rowntree Foundation suggests that for working-age childless adults, ‘safety net’ benefits provided only around a third of the amount necessary for a minimum acceptable standard of living in 2019 – down from around 40% in 2012. Over the same period, the percentage of the MIS covered by ‘safety net’ benefits also fell for families with children, though less markedly: for a lone parent with two young children it fell from 63% in 2012 to 58% in 2019, and for a couple with two children it fell from 60% in 2012 to 56% in 2019. 106 In its July 2019 report on the Welfare safety net, the Work and Pensions Committee noted that organisations giving evidence to its inquiry had told it that uprating changes and freezes had had “a substantial impact both on poverty levels amongst certain groups, and on wider indicators of “destitution” such as foodbank use and homelessness.” 107 The Committee said that lifting the benefits freeze in 2020 was a necessary first step, but not sufficient to “reconnect benefit rates with the cost of living.” It recommended that the Government commit to increasing the frozen benefits by CPI plus 2% for four years to reverse the real-terms reductions. The Committee also recommended that the Government set out plans for “linking the rate at which benefits are set with the real cost of living.” 108 The Government’s response emphasised that legislation requires that the Secretary of State can only make decisions about benefit rates at the time of each formal annual review. It also restated that the benefits freeze was “part of a package of reforms designed to incentivise work and make welfare fairer to those that receive it and fairer to taxpayers who pay for it.” 109
105 For further information on the rationale (such as there is) for benefit rates, see sections 2 and 3 of Commons Library Research Paper 13/01, Welfare Benefits Uprating Bill, 4 January 2013 106 JRF, A Minimum Income Standard for the UK 2008-2018: continuity and change, July 2019; Commons Library briefing CBP-8806, Benefits Uprating 2020, 4 February 2020, p9 107 Welfare safety net, HC 1539 2017-19, para 83 108 Ibid. paras 91, 94 109 Government response on Welfare safety net report published, Work and Pensions Committee press release, 5 November 2019 55 Commons Library Briefing, 5 March 2020
7. Infrastructure: spending and policy
Summary The National Infrastructure Strategy was to be published alongside the Budget, but may be postponed. The Strategy will set out the Government’s plans to invest in infrastructure that will help to “level up” economic growth and productivity across the country. It will also include details of infrastructure to help meet the target of net zero carbon emissions by 2050. The Strategy will require a considerable increase in investment spending. To enable this, the Government is changing the fiscal rules so that it can spend an additional £20 billion each year on infrastructure. The Conservative manifesto talked of an ‘infrastructure revolution’ and set out some specific projects, including £4 billion over five years for flood defences. The Budget will also include plans to boost private sector infrastructure investment. To achieve its aim to “level up” the different areas of the country, the Government will need to invest in projects that have long-term local impact, such as urban transport. The Government has already made some major announcements about transport infrastructure, including confirming that HS2 will go ahead, and plans to re-open branch lines closed in the 1960s. At the Budget, we may hear more about its Road Investment Strategy and the funding being provided to help local authorities improve local transport. The Government’s has an ambitious target for total R&D investment to reach 2.4% of GDP by 2027. Reaching it will require major increases in public and private R&D spending.
7.1 National Infrastructure Strategy At the Queen’s Speech, the Government said it would publish the National Infrastructure Strategy alongside the Budget. This will set out the Government’s infrastructure “ambitions” over the next 50 years and will outline how it intends to fund these priorities. The BBC have recently reported that publication of the Strategy may be postponed until after the Budget. The Strategy will set out the Government’s infrastructure “ambitions” for the next 50 years and will outline how it intends to fund its priorities. The Strategy will have three main aims: 110 1 To invest in projects that “enable prosperity and economic growth to be shared across the country”. This has been referred to as the Government’s “levelling up” agenda, and includes “connecting” all parts of the country with transport links and digital connectivity. 2 To invest in the infrastructure needed to achieve net zero carbon emissions by 2050. 3 To formally respond to the National Infrastructure Commission’s 2018 National Infrastructure Assessment. This report, by the independent National Infrastructure Commission, made
110 HM Government, Queen’s Speech 2019: background briefing notes, 19 December 2019, p90
56 Spring Budget 2020: Background briefing
recommendations in all areas of economic infrastructure: transport, energy, digital, waste, water and flood management. These three aims are cross-cutting and will influence each other. For example, the National Infrastructure Assessment recommended a national network of charging points for electric vehicles which would enable greater take up of these vehicles. This would help the UK achieve its net zero emissions target. And it would involve investment in the road network around the country, increasing investment in the regions and countries of the UK. The long-term nature of the Strategy and the likely scale of its ambition will require a major increase in investment spending by government and the private sector.
7.2 Infrastructure spending In 2019, public sector investment spending was £47.3 billion. 111 The fiscal rules proposed in the Conservative manifesto (see section 5) allow for investment spending to increase by around £20 billion in each year. Some commentators have questioned whether this scale of capital spending increase is possible. 112 Challenges include a lack of ‘shovel ready’ projects and skilled labour shortages. More broadly, finding projects to invest in quickly might lead to choosing projects that do not represent long-term value.
The new fiscal rules mean investment could rise by up to £20 billion a year. Public sector net investment, £ billions, current
80 70 Additional investment 60 allowed by new rules 50 40 30 Existing investment plans 20 10 0
Forecasts Source: Office for Budget Responsibility, Public finances databank, February 2020 The 2019 Conservative manifesto sets out how some of this additional investment will be spent. The largest commitment is to spend an additional £7.3 billion on R&D by 2023/24. However, all the investment commitments in the manifesto add up to £22 billion over four years. 113 This means that the government could increase investment by an
111 Public Sector Net Investment, ONS series JW2Z 112 Guardian, Tories and Labour warned over ambitious spending promises, 7 November 2019; Arno Hantzsche and Garry Young, Prospects for the UK economy, in National Institute Economic Review volume 251, February 2020 113 Conservative Party 2019 Manifesto, Costings Document, November 2019, p8
57 Commons Library Briefing, 5 March 2020
additional £58 billion over four years on top of what was announced in the manifesto and still meet the new fiscal rule. In international infrastructure rankings by the World Economic Forum, the UK is ranked 11th out 141 countries in terms of the overall quality of its infrastructure, behind France (7th), Germany (8th), and the Netherlands (2nd).114 According to Eurostat data, in 2017 the UK spent more on infrastructure (2.3% of GDP) than both France (1.5%) and German (1.2%), but less than the Netherlands (3.1%). 115 Projects currently planned The government’s Infrastructure Pipeline presents data on upcoming infrastructure projects. The following chart shows the value of upcoming projects by the source of funding.
Private sector projects make up 58% of investment planned for after 2021, Constant 2018 prices, £ billions
250
200 Public sector projects worth £93 billion planned after 2021
150
100 Private sector projects are worth £131 billion after 2021
50
0 2019/20 2020/21 2021/22 and beyond
Source: Infrastructure and Projects Authority/HM Treasury, Infrastructure Pipeline, 2018, House of Commons calculations Notes: All planned projects in the Pipeline, Excludes mixed public/private funding The Pipeline was last updated in November 2018 and does not include some of the projects likely to be in the Infrastructure Strategy or those announced at the Budget. But this data does show that public spending on infrastructure is only part of the picture. According to the 2018 figures, the private sector will fund 58% of projects planned for 2020/21 and beyond. The public sector mainly funds transport projects: central government funds railway and major roads; local authorities fund local transport. More information on transport projects can be found in section 7.4. Infrastructure spending across the UK
114 World Economic Forum, Global Competitiveness Report 2019, 2019, Pillar 2 115 ONS, Experimental comparisons of infrastructure across Europe, 2019; Data table, Tab: Gov infra invest - Gov spending. Figures are government gross fixed capital formation in infrastructure sectors, as a % of total government spending. Some investment included here is in assets not normally considered infrastructure (for example, computer equipment in the Department for Transport)
58 Spring Budget 2020: Background briefing
One of the priorities of the Infrastructure Strategy will be: …levelling up…every part of the country…through responsible and prudent investment in the infrastructure. 116 So how much variation is there in infrastructure spending in the regions and countries of the UK? The chart below looks across the regions and countries of the UK at the total value, per head, of infrastructure orders to construction firms from 2015 to 2019. The data below is not a perfect measure of infrastructure spending by region and so should be used cautiously. It only shows infrastructure orders to construction firms. This means that it excludes any infrastructure orders to non-construction sector organisations such as Network Rail, so the data excludes almost all railway infrastructure investment. See section 7.4 for transport infrastructure projects announced by the Government. In the period 2015 to 2019, infrastructure orders in Great Britain were worth £1,174 per head. Infrastructure orders per head were highest in Scotland, the East Midlands and London, at £1,500 to £1,600. The value of infrastructure orders was notably lower in the East of England, the South East and the South West (between £700 and £900).
Infrastructure orders per head, total for 2015 to 2019 £s per head, 2015 to 2019, infrastructure orders to construction firms
1,599 1,560 1,543
1,248 1,197 1,174 1,153 1,134 1,085 883 821 739
Source: ONS, Construction output in Great Britain, New Orders dataset, Table 6; ONS, Population estimates 2018 data, via NOMIS database Note: Excludes infrastructure investment by Network Rail Infrastructure often has an impact beyond the immediate area that it is located in. For example, a railway line will serve people along its route, and a power station will generate energy for the whole country. To achieve the Government’s aim of levelling up the country, the planned infrastructure investments will have to have a long-term impact on the area in which they are located. This means choosing projects with the potential to generate and facilitate local economic activity for many years to come.
116 HM Government, Queen’s Speech 2019: background briefing notes, 19 December 2019, p90 59 Commons Library Briefing, 5 March 2020
The National Infrastructure Commission states that projects focussed on “urban infrastructure” (such as local transport) and “digital connectivity” (including the roll out of full fibre broadband) have the greatest impact on local economies, compared to other infrastructure priorities, such as the national transport network or low carbon energy. 117 The following table shows the table underlying the chart above.
New infrastructure orders to construction firms
Total 2015-2019 (£ million) Per head (£s)
London 13.7 1,543 North West 9.1 1,248 Scotland 8.7 1,599 East Midlands 7.5 1,560 South East 7.5 821 West Midlands 7.1 1,197 Yorks & Humber 5.9 1,085 East 5.5 883 South West 4.1 739 Wales 3.6 1,153 North East 3.0 1,134
Source: ONS, Construction output in Great Britain, New Orders dataset, Table 6; ONS, Population estimates 2018 data, via NOMIS database Note: Excludes infrastructure investment by Network Rail Infrastructure Finance Review In March 2019, the Government launched a consultation on infrastructure funding which sought to find solutions to challenges regarding attracting investment. It is likely that the Government will report the findings from this consultation alongside this Budget. The specific challenges examined by the Infrastructure Finance Review included: • The end of UK access to finance from the European Investment Bank after Brexit (see below) • The end of the Private Finance Initiative (PFI) as a way of financing new infrastructure projects • Attracting funding to facilitate new technology, such as electric charging infrastructure, where returns on investment are uncertain The European Investment Bank The European Investment Bank (EIB) has been a major source of low- cost finance for infrastructure investment in the UK for many years, with projects receiving a total of €118 billion in loans since the Bank was set
117 National Infrastructure Commission, National Infrastructure Assessment: impact and costings notes, 2018
60 Spring Budget 2020: Background briefing
up in 1959. The UK’s departure from the European Union means that it has lost access to this source of funding. On 23 January 2020, the House of Lords EU Financial Affairs Sub- Committee sent a letter to the Exchequer Secretary to the Treasury, reiterating the conclusions of the Committee’s earlier report. The letter urged the Government to seek a “deep bilateral relationship” with the EIB, and to consider creating a UK infrastructure bank to “fill some of the gaps left” from no longer having access to the Bank’s services. In the Political Declaration agreed by the UK and EU in October 2019, both sides “noted the United Kingdom's intention to explore options for a future relationship with the European Investment Bank (EIB) Group”. 118
7.3 R&D spending One of the Government’s major investment priorities is research and development (R&D) spending. The Government has set itself the demanding target of total (public and private) R&D spending reaching 2.4% of GDP by 2027. 119 To help achieve this, the 2019 Conservative manifesto pledged “the fastest ever increase in domestic public R&D spending” over this Parliament. 120 Currently, total R&D spending (gross expenditure on research and development, which includes public and private investment) in the UK is £35 billion, the equivalent of 1.7% of GDP. Meeting the target of 2.4% would require an increase in the total amount spent on R&D each year of more than £14 billion. Further information about R&D spending can be found in the Library Briefing paper Research and development spending. Meeting the government's target requires £14 billion more investment in R&D each year by 2027 Total R&D spending in the UK as a % of GDP
3.0%
Government target: 2.5% R&D expenditure of 2.4% of GDP in 2027
2.0%
1.5%
1.0%
0.5%
0.0% 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 2025
Source: ONS series GLBH, House of Commons Library calculations
118 Department for Exiting the European Union, New Political Declaration, 17 October 2019 119 HM Government, Industrial Strategy, November 2017, p11 120 Conservative Party, General Election Manifesto 2019, November 2019, p40 61 Commons Library Briefing, 5 March 2020
7.4 Transport Transport infrastructure ranges from those things we can tangibly see like railways and roads to those we cannot see but that we use anyway, like flight paths and shipping lanes. Mostly, we talk about rail and road infrastructure, which means things like: • Rail: big schemes like HS2, East West Rail, Northern Powerhouse Rail and Crossrail; upgrade works on conventional lines; and the reopening of rural and community rail, much of it closed in the 1960s; and • Roads: big schemes like the Lower Thames Crossing and the Stonehenge Tunnel; smart motorways; upgrade works to A roads and bypasses; priority measure for buses and cycle superhighways and ‘mini-Hollands’. The Government has already set out its stall in many of these areas, though the Budget may put more flesh on the bones in some areas. On rail, we know for example what Network Rail will have to spend until 2024 and what major rail enhancements the Government is considering through the Rail Network Enhancements Pipeline (RNEP). In January 2020 the Government announced further details of its plans to reopen branch lines closed since the 1960s and progress on the route for East West Rail. In February 2020 the Prime Minister announced that the Government would go ahead with HS2. On roads, we expect the Government to publish full details of the projects and schemes that will form part of the second Roads Investment Strategy (RIS2) alongside the Budget – the Government announced in 2018 that Highways England would have £25.3 billion to spend on RIS2 to 2025. We may also see further details about the schemes designated for the Major Roads Network (MRN) first tranche of funding, which will be £3.5 billion. All this funding (£28.8 billion in total) comes from the new National Roads Fund – an earmarked pot of cash funded by Vehicle Excise Duty (car tax). In February 2020 the Government also announced an extra £5 billion for local authorities in England over the next five years to improve local public transport, particularly buses and active travel such as cycling. It is not clear yet how this money will be allocated or what limits will be placed on how it will be spent.
7.5 Flood risk management The 2019 Conservative manifesto commits £4 billion for “new flood defences”. 121 This has since been confirmed as “a further £4 billion in new funding for flood defences over the next five years”. 122 What is the current level of funding? At the end of June 2013, Defra committed to investing £2.3 billion in capital funding for flood defences covering the period 2015/16 to
121 Conservative Party, Get Brexit Done, Unleash Britain’s Potential: The Conservative and Unionist Party Manifesto 2019, pp 27, 55 122 HC Deb 24 Feb 2020, c52
62 Spring Budget 2020: Background briefing
2020/21. With subsequent funding announcements, the capital investment programme in flood and coastal erosion risk management (FCERM) currently totals £2.6 billion over the six- year period 2015-21. 123 FCERM capital spend £ million 2019/20 prices The table opposite shows a breakdown of the capital expenditure in real terms to 2018/19 and 2015/16 436 124 budgets for 2019/20 and 2020/21. It should be 2016/17 472 noted that comparisons of spending in individual 2017/18 420 years should be made with caution, as FCERM 2018/19 462 expenditure is driven by both planned expenditure 2019/20 501 and responses to particular extreme weather events. 2020/21 461 The allocation of resource funding is generally for a one-year period and the Environment Agency resource FCERM budget for 2019/20 was £262.9 million. 125 How does flood risk funding work? Most of the Government’s FCERM funding is provided to the Environment Agency (EA) as Grant-in-Aid. The Environment Agency spends some of this directly, but also passes on money to risk- management authorities for local schemes. The Environment Agency has said that it prioritises FCERM investment where the risk is highest and where it will offer the greatest benefits for people and property. 126 Another source of funding is raised through the partnership funding approach, under which local communities raise funding towards a scheme and either channel it through the Environment Agency or use it directly on FCERM projects, with central government also contributing. 127 For more information on sources of funding see Defra’s publication on Central Government Funding for Flood and Coastal Erosion Risk Management in England (updated September 2019). The EA’s programme of flood and coastal erosion risk management schemes show details of individual schemes and the funding they have received. How much funding will be needed in future? The current capital investment programme runs until 2021. The Government’s National Adaptation Programme (July 2018) includes an action to “review current funding arrangements ahead of determining funding needs beyond 2021, seeking to attract more non-public sector investment”. 128
123 PQ 3245, Floods: Rural Areas [21 January 2020] 124 See Appendix for underlying figures and sources. 125 Defra, Central Government Funding for Flood and Coastal Erosion Risk Management in England, September 2019 126 Environment, Food and Rural Affairs Committee, Written Evidence submitted by the Environment Agency (FCC0007), 14 May 2019 127 Defra, Central Government Funding for Flood and Coastal Erosion Risk Management in England, September 2019 128 Defra, The National Adaptation Programme and the Third Strategy for Climate Adaptation Reporting: Making the country resilient to a changing climate, July 2018, annex 2, p. 28
63 Commons Library Briefing, 5 March 2020
In that same month, the National Infrastructure Assessment recommended that the Government should put in place, by the end of 2019, a rolling six-year funding programme to “enable efficient planning and delivery of projects and address the risks from all sources of flooding”. 129 In May 2019, the Environment Agency (EA) set out its revised long-term investment scenarios for FCERM. These determine the economic optimum level of investment in the face of climate change, a growing population and the deterioration of flood assets. The EA calculated that the economic optimum investment is a long-term annual average of “over £1 billion” (the exact figure depending on policy choices) over 50 years. This was higher than the 2014 long-term investment scenarios, which put the baseline level at £860 million. 130 In its evidence to the EFRA Committee’s coastal flooding and adaptation to climate change inquiry (May 2019), the Environment Agency said it was seeking a settlement of “6 years plus” for both capital and maintenance funding. The EA also highlighted “opportunities to achieve greater value for money from the investment available” by benefitting the environment, stimulating sustainable growth and accelerating regeneration. 131 In a February 2020 speech, Environment Agency chief executive Sir James Bevan said that the Government’s £4 billion commitment would be “the biggest single investment ever”. He reiterated that “at least £1bn a year for the next 50 years” would be needed to build and maintain traditional hard flooding and coastal change infrastructure, but also said “much more than that” would be required for investment in resilient infrastructure and measures such as natural flood management. Sir James noted that “much” of this investment could come from non- Government sources. 132
129 National Infrastructure Commission, National Infrastructure Assessment, July 2018, p. 92 130 GOV.UK, Long-term investment scenarios (LTIS) 2019, 8 May 2019 131 Environment, Food and Rural Affairs Committee, Written Evidence submitted by the Environment Agency (FCC0007), 14 May 2019 132 GOV.UK, Defusing the 'Weather Bomb': The Future of Flood Defence, 25 February 2020
64 Spring Budget 2020: Background briefing
8. Tax
Summary The Budget gives the Chancellor the opportunity to deliver on some of the 2019 Conservative manifesto’s tax measures, some of which were confirmed at the Queen’s speech. All together the costed tax measures (but not spending measures) in the manifesto are estimated to increase revenues by around £3.7 billion in 2023/24. Keeping the corporation tax rate at 19% is the biggest revenue raiser in the manifesto. This raises revenues as the rate was set to be cut to 17%, which is reflected in the forecasts. The manifesto says that in 2020/21 the threshold at which employees and the self-employed begin making National Insurance contributions (NICs) will rise to £9,500. The threshold would have otherwise risen by inflation to £8,788. This is the most significant tax cut in the manifesto. Those individuals benefiting in full will pay £85 less in NICs. A Digital Services Tax is set to be introduced in April 2020 and the Chancellor may take steps towards reforming Entrepreneurs’ relief – a tax break for business owners. He may tackle issues relating to the tax relief received on pension contributions. One has seen some doctors not taking on additional hours, while another is a disparity between the relief received by non- taxpayers with different pension arrangements. History suggests that we might expect more tax measures in the Budget. Chancellors have often been most active in making tax policy in the first year following a General Election. 133 If the Chancellor wishes to increase day-to-day spending on services while still keeping to the Conservative manifesto’s rules for the public finances, he may need more tax (see section 5.3).
8.1 Conservative manifesto
Conservative manifesto tax measures raise revenues by around £3.7 billion in 2023/24 Estimated amount raised (+)/cut (-) from tax measures, £ billion 2020/21 2021/22 2022/23 2023/24 Revenue raisers Corporation tax: keep at 19% 3,000 5,200 6,000 6,300 Health immigration surcharge 320 530 554 578 Plastic packaging tax 0 0 330 310 Tax avoidance/evasion measures 0 50 150 200 Tax cuts NICs: threshold increase -2,170 -2,180 -2,340 -2,500 Employment allowance -470 -480 -490 -500 Business Rates -320 -10 -10 -10 Structure and Building Allowance -130 -205 -260 -315 R&D tax relief -85 -235 -265 -275 Tampon Tax 0 -15 -15 -15 Employer NICs for Veterans -20 -25 -25 -25
133 Institute for Government, How to be a tax-reforming Chancellor, December 2019, 65 Commons Library Briefing, 5 March 2020
Revenue raisers Corporation tax The Conservative manifesto pledges to reverse the current policy of reducing the corporation tax rate to 17% in April 2020. Instead, the corporation tax rate will remain at 19%, increasing forecast revenues by around £3 billion in 2020/21 and by over £6 billion in 2023/24. Maintaining the rate at 19% generates additional revenues as the previous forecast assumed that the rate would fall to 17%. The reduction to 17% was legislated for in the Finance Act 2016.134 The Prime Minister says that additional revenues from not decreasing the rate will be “put into the priorities of the British people including the NHS”.135 Further information about corporation tax can be found in: • House of Commons Library, Corporate tax reform (2010-2016), July 2016 • OBR, Onshore corporation tax, March 2018
The main rate of corporation tax is currently 19%. It was 28% in 2010. Rates of corporation tax
30% Manifesto pledges 25% Main rate to keep main rate at 19% 20% Small profit rate 15% (equalised with main Main rate is due rate in April 2015) to fall to 17%. 10%
5%
0% 2010 2012 2014 2016 2018 2020
Source: HMRC. Corporation tax statistics 2019, September 2019, Table A.6
Box 3.1: Corporation tax rates and revenues The main rate of corporation tax has fallen from 28% in 2010 to 19% today. At the same time corporation tax revenues have increased. However, this doesn’t mean that cutting the rate has increased revenues – there have been offsetting factors. Firstly, company profits have recovered from the effects of the financial crisis since 2010. This means there are now greater profits to be taxed. Secondly, government has made changes to other parts of the complex corporation tax system that increase revenues. The changes have often widened the profits that can be taxed. These include reducing capital allowances, introducing the bank surcharge and restricting companies’ ability to offset past losses against future profits.
134 The reduction was announced at Budget 2016 and was included in the subsequent Finance Act. Finance Act 2016, section 46. The rate for 2020 had previously been set to 18% in section 7 of Finance (No. 2) Act 2015 s.33. 135 Prime Minister Boris Johnson's CBI Conference speech, 18 November 2019
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Further information about corporation tax rates and revenues: • IFS. Cancelling further cut to corporation tax rate leaves revenue the same as before the 2008 crisis, 18 November 2019 • IFS. What’s been happening to corporation tax?, 10 May 2017 • HMRC. Corporation tax statistics, September 2019 • OBR. Onshore corporation tax, March 2018
Health immigration surcharge The Conservative manifesto pledges to increase the health immigration surcharge to £625 and to expand it to European Economic Area nationals.136 The charge – which is paid as part of an immigration application depending on the type of visa or status – is currently £400 for most applicants.137 The charge is intended to “ensure that migrants make a proper financial contribution to the cost of their NHS care.” 138 The Conservative manifesto says that the charge is being increased so that it covers the “full cost of use”, which they estimate at £625. 139 The Library briefing Immigration Health Surcharge: common casework questions has more information on the charge. Tax cuts Increasing the NICs threshold The Conservative manifesto pledges to increase the threshold at which employees and the self-employed start to pay National Insurance contributions on their earnings to £9,500 in April 2020. Inflation was set to increase the threshold to £8,788 in April 2020. The Government has already begun the process for increasing the thresholds.140 The threshold increase is expected to cost around £2 billion in 2020/21, rising to £2.5 billion in 2023/24. The IFS estimate that around 0.4 million people would be taken out of paying NICs. 141 Employees still paying NICs would pay £85 less a year than would otherwise have been the case. The self-employed would pay around £64 less a year as they pay a lower NICs rate. Households with more than one earner will see a larger benefit to their household incomes.
136 The EEA includes EU countries and Iceland, Liechtenstein and Norway 137 House of Commons Library, Immigration Health Surcharge: common casework questions, 22 January 2019 138 Home Office News Release, Migrant 'health surcharge' to raise £200 million a year, 19 March 2015 139 Conservative Manifesto 2019; Conservative Press Release, Conservatives announce range of measures to take back control of our borders, 17 November 2019 140 The Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2020 has been laid before Parliament. Treasury Press Release. 31 million taxpayers to get April tax cut, 30 January 2020 141 IFS. Conservatives’ proposed NICs cut would cost at least £2 billion a year and mostly benefit middle- and higher-income households, 21 November 2019 67 Commons Library Briefing, 5 March 2020
Notes: Assumes partial take-up of benefits and partial role-out of universal credit. Income deciles are derived by dividing households into groups according to individual’s household income adjusted for household size using the modified OECD scale
Source: Authors’ calculations using Family Resources Survey 2017–18 and UKMOD version A1.0+. UKMOD is maintained, developed and managed by the Institute for Social and Economic Research (ISER) at the University of Essex. For the IFS, raising the NICs threshold is “probably the best targeted way to help low and middle earners through cuts to direct taxes”. However, most of the benefits go to middle- and high-income households. This is because: 142 • many of the poorest households don’t earn enough to pay NICs • households with two people in work tend to be further up the income distribution • some benefits are assessed based on after-tax incomes, so many low-income households would see some of their gains from the NICs cut clawed back through reduced benefit entitlements
142 IFS. Conservatives’ proposed NICs cut would cost at least £2 billion a year and mostly benefit middle- and higher-income households, 21 November 2019
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The Resolution Foundation estimate that paying £85 less in NICs would see workers in households that receive Universal Credit having their Universal Credit reduced by £54, leaving them around £32 a year better off from the NICs threshold increase. 143 The IFS say that if the Government wanted to target low-income working households then this would be better achieved through increasing work allowances in tax credits and universal credit. But this would bring more families onto means-tested benefits. A further increase to £12,500? The Conservative’s ambition – as set out in their manifesto – is to increase the NICs threshold to £12,500 at some point in the future. Without a defined timeframe we can’t estimate how much achieving this ambition will cost. Raising the threshold to £12,500 will cost more the earlier it happens. In the meantime, the threshold will rise by inflation, which lowers the eventual cost of jumping to £12,500. The Resolution Foundation estimates that raising the threshold to £12,500 in 2023/24 would cost the Government £6 billion on top of the £3 billion that the increase to £9,500 will be costing by 2023/24. 144 The income tax personal allowance is currently £12,500. This is the amount of income most people can receive before they must pay income tax. However, the Government’s stated ambition isn’t for the personal allowance and NICs threshold to be aligned. After 2020/21, the personal allowance shall increase by inflation, so unless the NICs threshold is increased to £12,500 in 2020/21 the two thresholds won’t be aligned by this manifesto pledge.
Box 8.2: The personal allowance and higher rate threshold in 2020/21 Neither the income tax-free personal allowance nor the higher rate threshold (the point at which UK taxpayers outside of Scotland start paying the 40p rate of income tax) will increase in 2020/21. The personal allowance will be £12,500 and the higher rate threshold will be £50,000, as they were in 2019/20, unless the Chancellor announces something different at the Budget. Generally speaking, the default policy is for these two thresholds to increase by inflation. However, at Budget 2018 the Chancellor said that both would increase by more than inflation in 2019/20 and would then be frozen in 2020/21. The personal allowance applies to individuals across the UK, including those in Scotland. The £50,000 higher rate threshold only applies to UK taxpayers outside of Scotland. Further information on recent changes to income tax thresholds can be found in the Library briefing Income tax : increases in the personal allowance since 2010. Scotland’s proposed income tax schedule in 2020/21 can be found in: • SPICe, Scottish Budget 2020-21: income tax proposals, 10 February 2020 • SPICe, Budget 2020-21 tax proposals: running to stand still?, 7 February 2020 Further information about NICs can be found in: • House of Commons Library, National Insurance contributions (NICs): an introduction, 16 December 2019 • OBR, National Insurance Contributions, April 2019
143 Resolution Foundation, Oven-ready, safety-first: Assessing the Conservatives' 2019 manifesto, 24 November 2019. Figures don’t sum due to rounding. 144 ibid 69 Commons Library Briefing, 5 March 2020
Business rates Business rates are a property tax paid by occupants of non-domestic properties. Broadly speaking, the business rates due on a property are linked to how much the property might rent for on the open market. Various reliefs, both mandatory and discretionary, are available. A statement from the Financial Secretary to the Treasury elaborated on the business rates pledges made in the Conservative manifesto. 145 • Up to 90% of retail properties were set to receive a 33% discount on their business rates bills in 2020/21. 146 This discount will increase to 50% and extend to music venues and cinemas. 147 • pubs with a rateable value of less than £100,000 will receive a £1,000 discount on their business rates bill in 2020/21, which is in addition to the retail discount. • Office space occupied by local newspapers can currently receive a business rates discount of up to £1,500. The discount was set to expire after 2019/20 but is now being be extended until 31 March 2025. The package of measures will cost around £300 million in 2020/21. Most of the pledges are for 2020/21 only, so the cost in subsequent years is significantly less at around £10 million. Further information on business rates: • House of Commons Library, Business rates Employment allowance Qualifying employers can claim an allowance against their National Insurance contributions. This employment allowance is currently £3,000 a year. The Conservative manifesto pledges to increase it to £4,000 in April 2020 at a cost of around £0.5 billion. Further information on employment allowance can be found at: • HMRC, Employment allowance R&D tax credits R&D tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation. They either reduce a company’s liability to corporation tax or are provided as a payment to the company. From 1 January 2018, spending which qualifies – broadly speaking, spending on R&D-related activities – received a tax credit of 12%. The Conservative manifesto proposes increasing the rate to 13% at a cost of £0.1 billion in 2020/21, rising to around £0.3 billion in 2023/24. The OBR’s latest fiscal risks report discussed tax reliefs, including R&D tax credits.148 The OBR reports that the R&D tax credits can be “effective
145 Business rates reliefs: Written statement - HCWS64 (January 2020) 146 HM Treasury, Budget 2018, October 2018, para 3.33. 147 HM Treasury News Release, Happy hour for pubs as government cuts business rates, 25 January 2020 148 OBR, Fiscal risks – July 2019, paras 4.89 – 4.92
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in generating additional R&D, and can do so cost effectively. But as with any tax relief, as it becomes more generous and/or more complex, it increases incentives to re-badge existing expenditure as qualifying R&D or to engage in fraudulent claims.” Further information on R&D tax credits can be found in: • HMRC, Claiming Research and Development tax reliefs, April 2018 Structure and building allowance The structures and buildings allowance – introduced in Autumn Budget 2018 – is a 2% capital allowance available on new non-residential structures and buildings. It was introduced to address a gap in the UK’s capital allowances regime. In its current form, the allowance will cost an estimated £0.6 billion by 2023/24.149 The manifesto proposes increasing the rate to 3% at a cost of £0.1 billion in 2020/21, rising to around £0.3 billion in 2023/24.
8.2 Other tax issues Income tax, NICs & VAT: a tax lock The Conservative manifesto pledges not to raise the rates of income tax, National Insurance or VAT across this Parliament. These are the three largest taxes in the UK, contributing over 60% of tax revenues. Relatively large amounts can be raised by increasing their rates. An increase in the basic rate of income tax (currently 20p) by 1p would raise over £5 billion a year while a 1%-point increase in the main employee NICs rate (currently 12%) would raise around £4 billion. Over £6.5 billion would be raised from increasing the standard rate of VAT to 21%. 150 There are other ways to increase tax receipts, but the IFS say that the tax lock “might prove an unwelcome constraint if adverse economic conditions necessitate tax rises in the next five years, or if they decide they want to change tax rates for other reasons…”151 A similar pledge was included in the 2015 Conservative manifesto, although it went further by ruling out any extension to the scope of VAT, or an increase in the ceiling set for the main rate of NICs by employees. 152 In 2017, the then Chancellor Philip Hammond reversed a decision to increase a rate of NICs paid by the self-employed on the grounds that it would have breached the ‘tax lock’ pledge. The change would have reduced the tax advantage of the self-employed relative to employees.
149 HMRC. Policy paper Capital Allowances: Structures and Buildings Allowance, June 2019 150 HMRC. Direct effects of illustrative tax changes, April 2019 151 IFS. Tax in the manifestos, 5 December 2019 152 Further information is available in the Library briefings Background to the July 2015 Budget (section 4.2) Spring Budget 2017: a summary (section 3.2) 71 Commons Library Briefing, 5 March 2020
Box 8.3: Fuel duties: the cost of continuing to freeze Fuel duty rates have not changed since 2011, meaning that they have fallen in real terms by 17% since 2010/11. While the rate of fuel duty has not risen since 2011, freezing the rate isn’t official Government policy. The run of freezes was the result of a series of announcements made at Budgets or Autumn Statements, rather than as the result of a specific policy to freeze fuel duty. Such announcements overrode the Government’s stated policy that fuel duty should rise in line with inflation. Essentially, the Government cancelled each of the expected inflationary rises. To this day, Government policy is for fuel duty to rise each year by inflation. It will cost the Government around £0.8 billion to cancel April 2020’s inflationary increase. 153 The OBR estimates that “the cost of real-terms cuts to fuel duty rates announced since June 2010 is now around £10 billion a year in 2019- 20”. 154 The OBR say that continuing to freeze fuel duty rates but not changing policy to reflect this poses a risk to the public finances. 155 The IFS estimate that freezing fuel duties until 2022/23 would reduce annual revenue by £2.3 billion. 156 In other words, if the Government continues to annually freeze fuel duty, then the OBR’s revenue forecast is overstated by around £2.3 billion. Further information: • IFS, Green Budget 2019, October 2019, Section 9.4 • House of Commons Library Insight, Fuel duty: Would no further freezes mean more money?, July 2018 • House of Commons Library, Taxation of road fuels, October 2019
Entrepreneurs’ relief: a review? Entrepreneurs’ relief gives business owners a reduced rate of capital gains tax when they sell their shares. The Conservative manifesto says that they will review and reform the relief as the measure hasn’t fully delivered on its objectives. 157 The relief costs the Treasury over £2 billion per year. 158 The origins of Entrepreneurs’ relief are set out in the Library briefing Capital gains tax: recent developments. The relief was introduced by the Labour Government in 2008 with the intention of encouraging people to start new companies. It allows entrepreneurs to pay a lower rate of capital gains tax at 10% instead of the usual 20% on up to £10m of gains. The relief has been criticised for: • playing little role in entrepreneurial decision-making – few people think about the relief when making the investment decision; 159 • gains from the relief being increasingly concentrated on a small number of wealthier claimants. In 2017/18, three-quarters of the relief went to 5,000 people with gains of over £1 million. They received an average relief of £350,000 each. 160
153 HMRC. Direct effects of illustrative tax changes, April 2019 154 OBR. Fiscal risks report – July 2019, para 4.35 155 OBR. Fiscal risk report – July 2017, para 5.84-5.85 156 IFS. Green Budget 2019, October 2019, page 221 157 Conservative Manifesto 2019 158 HMRC. Estimated cost of non-structural tax reliefs (October 2019); HMRC. Table 4: Numbers of Entrepreneur's Relief [ER] liable taxpayers, amounts of gain qualifying for ER and tax charged at ER rate by year of disposal 159 OBR. Fiscal risks report – July 2019, paras 4.93-4.98 160 ibid; IFS. Tax: what can we expect?, 26 February 2020
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• being poorly targeted. It is available to many businesses that aren’t entrepreneurial but not available to entrepreneurs who cannot take their income in the form of capital gains; 161 • not incentivising individuals to invest more in their businesses; 162 • incentivising higher income owner-managers to retain profits in the company until they liquidate it. 163 A Digital Services Tax The Government is set to introduce a Digital Services Tax from April 2020. The policy was announced in the 2018 Budget and was endorsed in the Conservative manifesto. 164 For businesses operating in the digital economy, the tax aims to address a misalignment between the place where profits are taxed and the place where value is created. A 2% tax will be charged on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users. The Government estimates that the tax could raise about £400 million a year, 165 although the estimate is highly uncertain. 166
Box 8.4: Digital services tax: The background Over the last few years there has been a growing consensus among policy makers, academics and businesses that the international tax system has been outpaced by globalisation and the growth and scale of multinational enterprises (MNEs). Since the financial crash in 2008 there has also been widespread public concern as to the scale of corporate tax avoidance that has been facilitated by these trends. The OECD has co-ordinated efforts to reform the international tax rules through the ‘Base Erosion and Profit Shifting’ initiative, or ‘BEPS’ as it is known. In 2015, G20 Finance Ministers agreed a series of recommendations for setting minimum standards in national tax systems, revising international standards for the way those systems interlock, and promoting best practices. In turn the Government has introduced a series of reforms to the UK tax system in line with the BEPS initiative, as well as taking unilateral action to mitigate the risk of tax avoidance by MNEs. However, there is widespread agreement that these reforms, while significant, have not met the challenges posed to the global tax system by digitalisation and the emergence of major tech companies. At the time of the Autumn 2017 Budget the Government published a position paper in which it set out its approach for addressing this issue – supporting a second OECD-led initiative for an international agreement on taxing MNEs, while exploring the option for a new tax on the UK-generated revenues of specific digital platform business models. 167 In the 2018 Budget the then Chancellor Philip Hammond confirmed that the Government would introduce the Digital Services Tax (DST) from April 2020, given the relative lack of progress toward an international agreement. The Government launched a consultation exercise on the design of the DST, and in July 2019 confirmed that it would include statutory provision in the next Finance Bill to be
161 IFS. Tax reliefs: look for the tax design behind the big numbers, March 2018 162 IFS. Low rates of capital gains tax on business income lead to large tax savings but do not boost investment, 21 October 2019 163 IFS. Principles and practice of taxing small business. IFS working paper W19/31, December 2019 164 HC Deb 29 October 2018 cc661-2; HM Treasury, Digital Services Tax: Budget 2018 brief, 29 October 2018 165 HMRC, Introduction of the new Digital Services Tax, July 2019 166 OBR, Economic & Fiscal Outlook, Cm 9713, October 2018 para A9-14). 167 HM Treasury, Corporate tax and the digital economy: position paper, November 2017
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introduced after the 2019 Budget. 168 A number of other countries have announced similar plans for digital services taxes. In June 2019, G20 Finance Ministers agreed proposals drawn up by the OECD to find a consensus- based solution by the end of 2020. In October and November the OECD launched a two-part consultation: first, proposals for determining where tax should be paid and on what basis (‘nexus’), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (‘profit allocation’); and, second, a proposal for a ‘global minimum corporate tax level’. Reaching consensus has proved difficult with a strong division of opinion between the United States and other countries as to whether there should be a voluntary component to any new international rules, 169 and over the prospect of individual digital service taxes being introduced prior to any agreement being reached, 170 although participant countries recently reaffirmed their commitment to reach a “consensus-based long-term solution … working toward an agreement by the end of 2020.” 171 The Government has said it would disapply the DST if an appropriate global solution was successfully agreed and implemented, although it is unclear whether the OECD’s timeframe is achievable. 172 The Government has estimated that, if implemented, the UK’s DST could raise about £400m a year, 173 although there has been some question as to how reliable these estimates can be. 174
Previously announced tax changes for April 2020 Several previously announced tax changes are set to come into effect in April 2020: • the personal allowance and higher rate threshold are both being frozen at their 2019/20 level (see Box 8.2) • reforms to the off-payroll working rules (IR35) for the public sector are to be extended to larger businesses in the private sector. The Library briefing paper Personal service companies & IR35 has further information. • the revenue threshold at which companies must register for VAT is to be frozen at £85,000. The Library briefing paper VAT Registration has further information. • the tax-free threshold for inheritance tax will be frozen at £325,000. The threshold will start increasing by inflation from April 2021. The Library briefing paper Inheritance Tax has further information.
168 HMRC, Introduction of the new Digital Services Tax: tax information & impact note, 11 July 2019 169 “Brussels steps up pressure on US over global digital tax deal”, Financial Times, 5 December 2019 170 “UK to push on with digital tax in face of US anger”, Financial Times, 21 January 2020; “Editorial: International agreement on digital taxes is needed”, Financial Times, 23 January 2020 171 OECD press notice, International community renews commitment to multilateral efforts to address tax challenges from digitalisation of the economy, 31 January 2020 172 see, for example, Clifford Chance, The OECD proposal to revolutionise worldwide taxation: our assessment, 5 June 2019 173 PQ236552, 28 March 2019 174 The Office for Budget Responsibility’s assessment was that the Treasury’s approach to estimating the yield from this measure was “reasonable and central, but there is a high degree of uncertainty around the central estimates of the yield” (OBR, Economic & Fiscal Outlook, Cm 9713, October 2018 para A9-14).
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8.3 Pensions tax relief: current issues The Government says that it will report on a review being carried out into pensions tax relief arrangements for senior doctors at the Budget. The issues have meant doctors not taking additional hours. The Government may also take the opportunity to address a disparity wherein non-taxpayers on ‘net pay’ pensions arrangements can’t benefit from pensions tax relief but those on ‘relief at source’ arrangements can. The 2019 Conservative manifesto pledged to look at how the issue could be fixed. Pension tax rules affecting senior NHS clinicians Since 2010, the Government has taken steps to limit the amount of annual pension savings that benefit from tax relief. The nature of the work of senior NHS doctors – with consultants taking on additional work, often at short notice, to cover service pressures – means the changes have impacted on senior NHS staff. There are reports that to avoid substantial tax charges, doctors are not taking on additional hours. 175 Some steps have been taken to help alleviate the issue. On 18 December 2019, the Department for Health and Social Care confirmed that it would “carry out an urgent review of the pensions annual allowance taper problem” which would report at the Budget on 11 March. What steps were taken to limit pensions tax relief? The annual allowance (AA) limits the amount of annual pension savings that benefit from tax relief. The standard AA is now £40,000, down from £255,000 in 2010. To mitigate the impact of reductions in the AA, the Coalition Government legislated to allow people to carry forward unused allowances from the previous three years. There is also a tapered AA, introduced in April 2016, which operates to reduce an individual’s AA by £1 for every £2 of ‘adjusted income’ (essentially, total taxable income plus the real growth in value of pension rights over the year) over £150,000, down to a minimum of £10,000. Why do they impact on senior doctors? These rules apply across pension schemes in the public and private sectors. However, the nature of work – with consultants taking on additional work, often at short notice, to cover service pressures – means there has been an impact across the NHS. The tapered AA is having a greater impact in 2019/20, because this is the fourth year since its introduction, meaning that the capacity to carry forward unused allowances from previous three years is greatly reduced (DHSC consultation, July 2019). What measures have been taken to alleviate the doctors’ problem? The Department of Health and Social Care has consulted on proposals to allow senior medical staff to opt to build up pension benefits at a lower rate, in order to reduce the risk of incurring a tax charge. In
175 “Pensions row 'making bad situation worse in NHS'”, BBC, 13 January 2020 75 Commons Library Briefing, 5 March 2020
December 2020, it agreed to compensate senior clinicians incurring a charge in 2019/20, making this a binding contractual commitment. However, stakeholders, including the BMA, have continued to argue that this will not solve the problem and that urgent reform of the pension tax rules is needed. HM Treasury said in August 2019 that it would “review how the tapered annual allowance supports the delivery of public services, such as the NHS.” On 18 December 2019, the DHSC confirmed that it would “carry out an urgent review of the pensions annual allowance taper problem” which would report at the Budget on 11 March. This is covered in more detail in Library Briefing Paper Pension tax rules – impact on NHS consultants and GPs. Net pay The principle of the current system of tax relief is that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out to the individual. Pension contributions made by individual employees are usually paid out of pre-salary, so tax relief is received at the individual’s marginal tax rate. There are two ways to administer tax relief on pension contributions: • “Net Pay” takes pension contributions before tax has been paid, so people automatically receive tax relief at their correct marginal rate; • “Relief at Source”, where contributions are deemed to have had tax at the basic rate deducted and the pension scheme then claims the relief from HMRC. As Gov.UK explains, non-taxpayers can benefit from tax relief but only if their pension scheme operates ‘relief at source’ arrangements: If you don’t pay Income Tax You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you: 1. you don’t pay Income Tax, for example because you’re on a low income 2. your pension provider claims tax relief for you at a rate of 20% (relief at source). In October 2019, the Office of Tax Simplification recommended that the Government should “consider the potential for reducing or removing the differences in outcomes between net pay and relief at source schemes for people whose income is below the personal allowance, without making it more complicated for those affected.” In their manifesto for the 2019 election, the Conservative Party said it would “conduct a comprehensive review to look at how to fix this issue.” In advance of the Budget on 11 March, the Net Pay Action Group called on the Government to “provide a firm timeline for its pledged review of the system and commit to implementing a solution.”
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This is discussed in more detail in Library Briefing Paper CBP 7505 Reform of pension tax relief. 77 Commons Library Briefing, 5 March 2020
9. Next steps What happens after the Budget statement? The Chancellor’s Budget speech and the accompanying Budget report are only the start of the process for raising taxes for the upcoming year. Parliament must give its provisional approval to the tax changes proposed in the Budget and will debate the Budget over four days. Parliament’s provisional approval is given to some measures immediately after the Budget statement with others approved within 10 sitting days of the Budget. The provisional arrangements must then be given permanent effect; this is done later through the Finance Bill. The Library briefing The Budget and the annual Finance Bill sets out the way that Parliament debates the Budget and scrutinises the Finance Bill. The Institute for Government has an explainer Voting on the Budget. We are expecting another budget in autumn 2020, which would be in keeping with the timetable started by former Chancellor Philip Hammond. The Government’s fiscal calendar is set out in Box 9.1. As discussed in section 6.1, a Spending Review is expected sometime this year. Parliament’s approval of spending Although the Chancellor may often mention public spending in his Budget speech, the procedure by which Parliament scrutinises and approves of government expenditure is quite separate. This procedure is set out in the following documents: • House of Commons Library, Main Estimates: Government spending plans for 2019/20, May 2019 • Scrutiny Unit, Financial scrutiny uncovered, November 2017
Box 9.1: Government’s fiscal calendar The fiscal calendar can change, but the below is a summary of the process and timings for a typical financial year: • April: Government departments’ spending plans (Main Estimates) are published. • July: Government departments’ spending plans (Main Estimates) are debated in the House – using new procedures. • July: a Supply and Appropriation (Main Estimates) Bill is introduced and, if agreed, receives Royal Assent, formalising Main Estimates as departments’ initial budgets for the year. • July: Government departments lay their Annual Reports and Accounts (for the financial year ending the previous March) before Parliament. • November: the Budget is published. Following the Budget a Finance Bill is introduced. Royal Assent of the Bill should be reached in the spring, before the start of the following financial year. • November: the OBR publishes its economic and fiscal forecasts. • February: Government departments’ revised spending plans (Supplementary Estimates) are published, debated in the House – using new procedures. • February: Government requests advance funding for the first four months of the next financial year (Vote on Account) for each department.
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• March: a Supply and Appropriation (Anticipations and Adjustments) Bill is introduced and, if agreed, receives Royal Assent, formally agreeing to revise in-year budgets as set out in Supplementary Estimates, and advance money for the new year in the Vote on Account. • March: the OBR’s economic and fiscal forecast is published. The Chancellor makes a formal response to the forecast in the spring statement. The spring statement may also review, and consult on, wider challenges for the economy and public finances. Further information is available in the following Library briefings: • The Budget and the annual Finance Bill, January 2020 • Main Estimates: Government spending plans for 2019/20, May 2019 • Public spending: New debates in the House, January 2018 • Revised Government spending plans for 2019/20, February 2020
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Appendix: Economic and public finance data 1979-2023
Economic data, 1979-2023 Real GDP Inflation CPI ILO year on year growth annual rate Unemployment % % Q4, %
1979 3.7% .. 5.5% 1980 -2.0% .. 8.0% 1981 -0.8% .. 10.2% 1982 2.0% .. 11.1% 1983 4.2% .. 11.7% 1984 2.3% .. 11.6% 1985 4.1% .. 11.3% 1986 3.2% .. 11.3% 1987 5.4% .. 9.7% 1988 5.7% .. 8.0% 1989 2.6% 5.2% 7.0% 1990 0.7% 7.0% 7.5% 1991 -1.1% 7.5% 9.5% 1992 0.4% 4.2% 10.4% 1993 2.5% 2.5% 10.3% 1994 3.8% 2.0% 9.0% 1995 2.5% 2.6% 8.3% 1996 2.5% 2.4% 7.8% 1997 3.9% 1.8% 6.5% 1998 3.6% 1.6% 6.1% 1999 3.4% 1.3% 5.8% 2000 3.4% 0.8% 5.2% 2001 3.0% 1.2% 5.2% 2002 2.3% 1.3% 5.1% 2003 3.3% 1.4% 4.9% 2004 2.4% 1.3% 4.7% 2005 3.2% 2.1% 5.1% 2006 2.8% 2.3% 5.5% 2007 2.4% 2.3% 5.2% 2008 -0.3% 3.6% 6.4% 2009 -4.2% 2.2% 7.8% 2010 1.9% 3.3% 7.9% 2011 1.5% 4.5% 8.4% 2012 1.5% 2.8% 7.8% 2013 2.1% 2.6% 7.2% 2014 2.6% 1.5% 5.7% 2015 2.4% 0.0% 5.1% 2016 1.9% 0.7% 4.7% 2017 1.9% 2.7% 4.4% 2018 1.3% 2.5% 4.0% 2019 1.4% 1.8% 3.8% 2020 1.4% 1.9% 4.1% 2021 1.6% 2.0% 4.0% 2022 1.6% 2.0% 4.0% 2023 1.6% 2.0% 4.0% Sources: ONS (series, IHYP, CZBH, D7G7, MGSX) OBR, Economic and fiscal outlook, March 2019, Table 3.8, and Supplementary Tables 1.6 & 1.7
80 Spring Budget 2020: Background briefing
Public finance data 1979/80 to 2023/24 Public sector net borrowing Structural deficit Public sector net debt £ billion % GDP £ billion % GDP £ billion % GDP
1979/80 8.5 3.7% 9.2 3.9% 98.2 39.1% 1980/81 11.5 4.3% 7.7 2.9% 113.8 40.4% 1981/82 6.0 2.0% -0.4 -0.1% 125.2 40.1% 1982/83 8.5 2.6% 2.0 0.6% 132.5 38.7% 1983/84 11.8 3.3% 7.2 2.0% 143.6 38.9% 1984/85 12.5 3.3% 10.7 2.8% 157.0 38.7% 1985/86 9.0 2.1% 9.0 2.1% 162.5 37.1% 1986/87 8.4 1.8% 9.1 2.0% 167.8 34.8% 1987/88 4.7 0.9% 10.7 2.1% 167.4 31.0% 1988/89 -6.0 -1.1% 5.8 1.0% 153.7 25.6% 1989/90 -0.6 -0.1% 7.9 1.3% 151.9 23.1% 1990/91 6.2 0.9% 4.7 0.7% 151.1 21.7% 1991/92 23.0 3.2% 13.1 1.8% 165.8 22.9% 1992/93 47.1 6.4% 35.0 4.7% 201.9 26.7% 1993/94 51.6 6.6% 41.7 5.3% 249.8 31.2% 1994/95 43.8 5.3% 37.0 4.5% 290.0 34.6% 1995/96 35.3 4.1% 23.6 2.7% 322.1 36.1% 1996/97 27.7 3.0% 23.5 2.6% 347.0 36.9% 1997/98 9.3 1.0% 19.8 2.1% 350.6 35.7% 1998/99 -1.0 -0.1% 10.9 1.1% 349.3 33.9% 1999/00 -11.4 -1.1% 0.9 0.1% 339.5 31.3% 2000/01 -15.7 -1.4% -5.5 -0.5% 307.6 27.2% 2001/02 5.4 0.5% 10.6 0.9% 314.6 26.8% 2002/03 34.1 2.8% 32.6 2.7% 348.7 28.1% 2003/04 41.7 3.3% 43.7 3.4% 382.2 29.3% 2004/05 49.2 3.7% 55.9 4.2% 436.6 31.8% 2005/06 44.3 3.1% 49.3 3.5% 475.5 32.6% 2006/07 40.0 2.7% 44.1 3.0% 510.5 33.4% 2007/08 45.7 2.9% 58.7 3.7% 544.7 34.2% 2008/09 117.9 7.5% 112.6 7.2% 757.0 48.8% 2009/10 158.3 10.2% 126.2 8.1% 996.9 62.9% 2010/11 140.4 8.7% 115.4 7.1% 1,140.0 69.3% 2011/12 122.2 7.3% 103.3 6.2% 1,236.2 72.9% 2012/13 125.4 7.3% 106.2 6.2% 1,342.8 76.2% 2013/14 105.5 5.8% 86.4 4.8% 1,442.8 78.1% 2014/15 96.9 5.2% 86.3 4.6% 1,528.0 80.5% 2015/16 81.1 4.2% 73.7 3.8% 1,578.8 79.9% 2016/17 56.1 2.8% 51.6 2.6% 1,701.5 82.9% 2017/18 56.5 2.7% 55.8 2.7% 1,752.8 82.4% 2018/19 38.4 1.8% 40.1 1.9% 1,773.5 80.7% 2019/20 47.6 2.2% 47.0 2.1% 1,817.0 81.3% 2020/21 40.2 1.8% 37.9 1.7% 1,809.8 78.2% 2021/22 37.6 1.6% 35.8 1.5% 1,780.9 74.3% 2022/23 35.4 1.5% 34.9 1.4% 1,826.5 73.6% 2023/24 33.3 1.3% 33.3 1.3% 1,869.8 72.7% Source: OBR, ONS Note: figures exclude public sector banks
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