John Campbell

Columnist

John Campbell

Economics & Business Editor, BBC Northern Ireland

Kick start the economy

BBC NI’s Economic & Business Editor, John Campbell, discusses the budget plans post-COVID.

The last few weeks have been a tale of two budgets: one, which will hopefully drive an economic recovery and one, which probably can’t.

The hope lies with the Westminster budget, the pessimism at Stormont. Rishi Sunak’s budget has been characterised as ‘spend now, tax later’ and certainly the spending taps stay open through to the autumn and beyond.

There is around £70bn in additional fiscal support for the economy over the next two years with a significant chunk of that devoted to the crisis measures which have supported businesses and households through the pandemic.

Taking the furlough scheme and the self-employed support grant all the way out until the end of September will help keep a floor under the labour market. But I think we can discern that the Treasury expects that virtually all businesses will be reopened to some extent by July. That is the point at which employers will have to start making a 10% contribution towards the hours their furloughed staff do not work, increasing to 20% in August and September. It stands to reason that if you are expecting employers to do this then you will also have allowed them to open their doors and start earning revenue again.

This may also make moot the discussion about the lack of dates in the Stormont reopening plan. It is going to be hard for any of the devolved administrations to significantly diverge from London’s reopening timetable when the phase out of the furlough is being decided by the Treasury.

Once the furlough and related schemes end there is not much by way of lasting support for households and this looks like the biggest calculated gamble of the budget.

The bet is that wealthier households, which have been accumulating savings during the pandemic, go on a spending spree, which will support jobs across the wider economy. For example Danske Bank says that their customer deposits have increased by £2bn in the past 12 months, something the bank has not seen in its 200-year history. So the Chancellor’s expectation is that people will need little prompting to spend some of that on clothes, meals, cars and weekend breaks.

When it comes to spending by business the budget has a much more active policy. The planned rise in corporation tax got most of the headlines but it’s the two-year capital allowances bonanza where the action is for now. Essentially the Chancellor is telling companies ‘this is a once in a lifetime opportunity to get a massive tax advantage by investing in new plant and equipment so if you have the cash now is the time to spend it.’

Underinvestment has been a chronic problem not just here but across the whole of the UK so perhaps this will be a decisive shove with long-term productivity benefits as well as short-term stimulus. With Stormont’s budget for the next financial year stimulus is in short supply.

The Finance Minister Conor Murphy certainly did not raise expectations when he published the draft budget in January. ‘It is difficult and effectively a standstill of our 2020-21 budget

“The bet is that wealthier households, which have been accumulating savings during the pandemic, go on a spending spree, which will support jobs across the wider economy.”

position,’ he said. Adding that it had not delivered the required level of support “to kick start our economic recovery from COVID-19 and Brexit”.

The Ulster University Economic Policy Centre (UUEPC) have performed a useful appraisal of that block grant settlement. For starters they point out that it can be difficult to keep track of how Stormont’s finances really change from year to year due to ‘lumpy budgeting.’

Those lumps are bits of one-off funding which flow from various political events in recent years: Fresh Start, Confidence and Supply and New Decade, New Approach. They are programmed over various time periods, with various strings attached and don’t form part of the budget baselines as they are non-recurring, so often you find yourself comparing out-turns, baselines and monitoring rounds to get a sense for where we really are.

Having done that the UUEPC come to similar conclusions as the Minister: ‘Overall resource funding is very tight, but RRI borrowing should provide additional capital funding, but this collectively presents a very challenging funding settlement.’

They particularly look at the allocation for the Department for the Economy saying it is ‘concerning that additional funding does not appear to have been identified to support the rebuilding of the economy post-COVID.

‘The economy has suffered a shock unprecedented in scale and the budget allocation for the Department for the Economy is below (in real terms) its pre-COVID budget.’

It is likely that the Department will receive additional allocations through the financial year, but its firepower will remain limited. And although the era of austerity is technically over there does not look to be much prospect of Stormont receiving large uplifts in departmental funding during the rest of this Parliament.

The Chancellor’s plans show that day-to-day spending (technically known as Resource DEL) for the UK is set to rise by 3% a year between 2019-20 and 2021-22. But after that the line on the chart heads in the other direction. UK Resource DEL is now planned to be £15bn a year lower in real terms in 2024-25 than was planned before the pandemic.