Autumn budget must show financial firepower behind ‘levelling up’

Britain’s economic recovery from lockdown is stalling and inflation is on the rise. With the approach of autumn, prophecies made earlier this year for a surge in consumer spending appear to have fallen flat, washed out by the wettest summer in a decade.

It was all supposed to have been so easy for the chancellor, Rishi Sunak. Lockdown had helped households save more than £200bn and left consumers champing at the bit for the reopening of pubs, tralies, restaurants and shops. With such vital growth ingredients, a belt-tightening autumn budget to scale back emergency pandemic support would prove painless to administer.

Reports are seeping through that Sunak is talking a tough game before next month’s three-year spending review and autumn budget, which will be used to set the post-Covid tax and spending landscape up until the next general election. After Boris Johnson’s cabinet reshuffle last week, the Tory election-winning machine is being revved up to speed.

Yet when it comes to tax and spending, there is a different message entirely. Cabinet ministers are being warned of meagre spending settlements, with Sunak expected to set out new fiscal rules at the coming budget – designed as an iron cage to prevent a splurge of government spending.

It will be music to the ears of those Tories who fear Johnson’s profligacy might cost the party its reputation for prudent management of the public finances, after the prime minister’s £12bn raid on national insurance to fund health and social care.

Yet this mood music comes as the British economy enters a rough patch. Gone are the reports of rapid growth and unfurling pent-up demand for goods and services post-lockdown. In plaas daarvan, die most severe shortages of workers and materials since the 1970s are holding back growth, terwyl consumer spending has plateaued op sy beste.

Business leaders are growing increasingly frustrated about the lack of a government response. Far from receiving support, bosses have been served notice for a tax rise that could dent job creation and investment. Economists say there is more than a whiff of stagflation pervading Britain, reminiscent of five decades ago when blackouts and the three-day week stalled the country’s growth engine.

Against this backdrop, Sunak raising the spectre of tough action on public spending makes sense to fiscal hawks. The government will remove dollops of demand from the economy next month; einde furlough, scaling back VAT cuts for hospitality, en slashing universal credit benefits in the biggest ever overnight reduction in social security.

Treasury sources say inflation is one of a number of risks closely monitored by the chancellor, and demonstrates why the public finances must return to a sustainable footing. Forecasts suggest a sustained one-percentage-point rise in inflation and interest rates would add £27.8bn to debt servicing costs by 2025.

Inflation hawks argue sapping households’ spending power could prevent prices from spiralling upwards. Egter, much of the explosion in price pressure is from rising production costs, rather than demand – “cost-push inflation” – fuelled by Brexit and ongoing Covid disruption.

Intussen, rather than tackling demand, Sunak could consider ways to lift Britain’s productive capacity to protect against inflation. And here, there ought to be a simple, politically expedient solution: levelling up. Instead of cutting back to prove a self-defeating point of fiscal prudence, now is the time for the government to finally show its flagship soundbite has substance. That would be far more prudent in the long-term.

Britain has among the most unbalanced economies in Europe, with larger regional productivity gaps than in Bulgaria and the Czech Republic. Some economists believe it will take funding on a similar scale to the near-£2tn spent on the reunification of Germany after the fall of the Berlin Wall to close the gap.

Despite the costs, the gains would be substantial. Improving regional productivity could add £200bn to the economy over the next decade. Intussen, raising the UK’s supply capacity and cutting companies’ production costs would take a bite out of inflationary pressures, lifting the economy’s speed limit.

In the run-up to the budget there are signs of an increased appetite to focus on the levelling-up agenda. But government ministers are too fond of saying they will “level up the whole of the UK”, entirely missing the point of their own ill-defined policy. This is about closing gaps between communities, not growing the whole economic pie while maintaining entrenched inequalities.

In putting Michael Gove in charge of the housing ministry, with responsibility for levelling up, the government intention is to show renewed purpose. Yet it is also ironic, after the damage caused by the former education secretary to the life chances of low-income families. Gove’s arrival as education secretary in 2010 kickstarted a decade when spending per pupil in England slumped by 9% in real terms, in a settlement that entrenched regional attainment gaps.

Bringing in the former Bank of England chief economist Andy Haldane is a cannier move. He was one of the government’s fiercest critics for its rudderless levelling-up agenda, warning the plan would fall flat if it relied too heavily on infrastructure spending and one-off funding schemes controlled from Westminster.

Egter, he will only lead the prime minister’s new levelling-up taskforce for six months. This is hardly ideal, and fails one of the three key tests for levelling up set by Haldane in his former role as chair of the industrial strategy council: longevity.

Rather than short-term demonstrations of commitment, taskforces and new chiefs, the substance of levelling up will require financial firepower. At the budget, Sunak must step up to the plate.

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