Since taking office on 24 July, the new Prime Minister Boris Johnson has rolled out plans to boost the economy and public spending. But how will he pay for it?
During his campaign for the Conservative leadership, Mr Johnson restated his intention to deliver an early Emergency Budget in the run-up to the Brexit deadline on 31 October.
The rumour mill has been working overtime, with advisers and junior ministers appearing to contradict each other. One report in The Sunday Times on 28 July said that a close aide claimed preparations are underway for a Budget as early as the second week of October. A few days later the Chief Secretary to the Treasury did not rule it out when given the opportunity to do so. Despite the Treasury’s protestations that Budget announcements are in the Chancellor’s hands, there is expectation that something is in the offing earlier than usual.
What’s on the agenda?
At the end of June Mr Johnson’s campaign reiterated that he wanted to ensure the British economy is “going gangbusters” by the Brexit deadline and had a raft of measures in mind to stimulate the pre-Brexit economy and electorate. These include:
- Increasing the 40p higher rate tax threshold from £50,000 to £80,000 - at an estimated cost of £9.6 billion, according to the Institute for Fiscal Studies.
- Raising the national insurance contribution threshold from £8,632 to £12,500 - at a cost of £11 billion a year.
- Reducing VAT, perhaps temporarily.
- Overhauling stamp duty to abolish duty on homes valued at under £500,000, reversing the stamp duty increases on more expensive homes (originally introduced by George Osborne) and potentially shifting the stamp duty payment from buyer to seller
- Imposing a moratorium on new business regulations (‘red tape’).
- Increasing the annual investment allowance significantly above the current £1 million level to help boost business.
- Creating a £100 billion infrastructure fund over five years (originally proposed by the new Chancellor, Sajid Javid)
- Increasing the number of police by 20,000 at a cost of £1 billion.
- Pledging £5 billion to reverse education cuts since 2015.
- A new trans-Pennine railway between Leeds and Manchester.
- £1.8 billion for NHS projects
In a context of nearly full employment and low government borrowing figures, the new Chancellor Sajid Javid will also need to take into account the latest public sector finance figures which have come in worse than forecast - a 33% increase for the first three months of 2019/20 against the same period for 2018/19. While revenue stayed in line with forecasts, expenditure was above the OBR forecast at 5.9% versus 3.3%. The fiscal rules set out by the previous Chancellor Philip Hammond mean there is some room - about £26 billion - to borrow.
Mechanics of an emergency Budget
While Mr Johnson originally spoke of a Budget in September, parliamentary requirements make this difficult.
- The parliamentary recess started on 26 July and lasts through to 3 September,
- Parliament has two weeks of working prior to the conference season beginning on 12 September.
- The last of the conferences, the Conservatives, runs through to 2 October.
- The earliest realistic date to deliver a Budget (if they stick to the traditional Wednesdays) could be 9 October.
Budgets operate under a set of rules:
- The Office of Budget Responsibility (OBR) needs 10 weeks’ notice to prepare its Economic and Fiscal Outlook (EFO), published alongside the Budget. If Mr Javid triggered the OBR notification on 24 July, the 10-week period gets to 2 October. No information about such a trigger has been released to date.
- The OBR also needs to base its EFO on a particular set of assumptions. So far this has been on the basis of a Brexit deal. For a no-deal scenario, it would have work from a new base. Some work has been done in its Fiscal Risks Report, based on scenarios from the IMF, which the Treasury will need to address.
- The spending cycle is coming up for review and the 2019 Budget should set out the next spending review for 2020/21 and generally the next few years. Brexit has upended the usual calculations so a new Chancellor will still have to prepare at least the 2020/21 figures.