Pity Rishi Sunak.
Thrust into the role of Chancellor of the Exchequer following the surprise departure of Sajid Javid, the bright but inexperienced Sunak is facing a tsunami of uncertainty when Britain is in need of calm water ahead of its exit from the European Union.
The twin economic shocks of coronavirus and the market panic sparked by the opening rounds of an oil price war between Saudi Arabia and Russia have rendered an already difficult task – delivering a maiden budget – almost impossible. The inaugural budget of the majority Johnson era was supposed to focus entirely on “levelling up” and delivering for the new Tory heartlands of the North of England, not getting the country prepared for disasters that weren’t on the horizon when they won big in December 2019.
Even worse, no one in HM Treasury (or the Department of Health and Social Care) knows what the short, medium or long term impacts of the coronavirus will be. Sunak has been forced into firing some of Britain’s fiscal cannon into the dark, with only a sketch outline of his target. And while the £30 billion worth of measures proposed by Sunak in his budget – the easing of statuatory sick pay requirements, more support for those on benefits, tax and other relief for businesses, increased funding for public services – appear sound, significant, and well-targeted, the virus could overwhelm them if infection rates soar.
The trouble is, any further action on coronavirus will eat into the fiscal reserves that were waiting to be summoned should Britain crash out of the European Union with no deal at the end of the year. And while the government remains convinced it will secure its preferred Canada-style deal, the OBR estimates say that even this best-case scenario will provoke a 4% hit to the national GDP over time. If Britain does need a boost come December to manage Brexit, Sunak will now have a lot less firepower at his disposal.
And the same now holds true on the monetary front, thanks to the Bank of England’s snap decision to cut interest rates from 0.75% to 0.25% ahead of the budget. The BoE will also be extending its lending facilities to banks to support businesses. And while flooring interest rates worked to counteract the worst of the 2008-09 global recession, their efficacy in blunting the supply shock forecasted by the spread of coronavirus is less certain. If there was a rate cut in the cards the government would have wanted it deployed in the event of a rough Brexit, not to halt the spread of the economic impacts of a novel virus.
Then again, why you’ve already stretched your own spending rules, as the Chancellor has with this budget, stretching them more in the future becomes easier, not harder, to do. If Brexit produces a crunch come year end the answer will surely come in the form of more red ink, something the opposition parties will have a hard time arguing against. In other words, meet big-spending Rishi Sunak, the former hedgie turned fiscal firefighter. And meet the new Conservative Party, not the same as the old Conservative Party.