Chancellor’s audacious spending spree aims to ‘level up’ the country

Rishi Sunak has launched a £175billion productivity revolution to push through the Government’s agenda to ‘level up’ the economy.

The Chancellor claimed to have received unprecedented backing from the independent Office for Budget Responsibility (OBR) for his huge increase in public investment over the next five years.

Delivering his Budget, he said: ‘The OBR has said that, as a direct result of the plans I’m announcing, growth over the next two years will be 0.5 percentage points higher than it otherwise would have been.’

The Chancellor claimed to have received unprecedented backing from the independent Office for Budget Responsibility for his huge increase in public investment over the next five years

He added: ‘The OBR has made an estimate it has never made before. It has said that today’s ‘large planned increase in public investment should boost potential output too’.’

Sunak is injecting £175billion into roads, rail and other infrastructure over five years.

Britain’s dire productivity record in recent years, routinely the worst among the G7 advanced nations, has been blamed for sluggish wage growth. 

But Sunak said that, provided future governments matched the current administration’s commitment, long-term productivity could increase by 2.5 per cent.

Paul Johnson, director of the Institute for Fiscal Studies, said the substantial rise in capital spending was ‘genuinely striking’. But he warned: ‘A key challenge will be to ensure that this money is spent well.’

Another Budget bonus for the Chancellor was a £37billion windfall thanks to rock-bottom interest rates.

That’s how much he will save on the interest bills on government borrowing between now and 2023-2024 as a result of the reduction.

The OBR calculated the annual average £7.4billion saving before yesterday’s emergency rate cut from the Bank of England, from 0.75 per cent to 0.25 per cent, so the final figure could be even higher.

Such low rates, combined with the quantitative easing programme, where the Bank uses newly created money to buy government bonds, have created an ideal climate to ease the burden of Treasury borrowing, but they are unpopular with savers, whose returns have been slashed.

The debt interest windfall was a rare example of frugality in a Budget that saw Sunak accused by some of embarking on a spending and borrowing spree that had left the Treasury’s fiscal rules in tatters. 

His planned review of the current framework for the public finances seems almost certain to result in a looser regime.

The claim that the Budget fell within the existing rules could be undermined by the spending pledges. On the coronavirus, he said: ‘Whatever extra resources our NHS needs…it will get.’

He committed the Treasury also to an expansion of sick pay and universal credit, and said: ‘I will do whatever it takes to support the economy.’

Kallum Pickering, senior economist at Berenberg bank, warned: ‘The Chancellor emphasised the UK’s fiscal response to Covid-19 would be proportional to its economic impact. 

We would not be surprised if the final cost came in materially higher than the Chancellor’s £12billion estimate.’

Aside from the virus, Sunak made what seemed an open-ended infrastructure vow: ‘We’re going to build broadband, railway, roads – if the country needs it, we will build it.’

Current fiscal rules, drawn up by his predecessor Sajid Javid, commit the Government to a balanced current account budget by the middle of the 2019-2024 Parliament, to ensure borrowing for infrastructure investment does not exceed 3 per cent of GDP, and to reassess the framework should interest costs rise to 6 per cent of GDP.

Sunak said interest rates are expected to remain very low for an extended period, and a review into the fiscal rules would be conducted over the summer – with the aim of supporting the new policy agenda of the Government to level up every part of the country.

Matthew Lesh, at the free-market Adam Smith Institute, said: ‘It is seriously concerning that the Government is looking at ripping up the fiscal rules. A Conservative government should not implement debunked Keynesian stimulus theories.’

He added: ‘Spending like a drunken sailor will not create a thriving entrepreneurial economy. Expansive vanity projects won’t make us better off.’

At the Institute of Economic Affairs Julian Jessop said: ‘It could have been far worse. The Chancellor could have used the cover of coronavirus to abandon the fiscal rules today.’

Dhaval Joshi, at economist consultancy BCA, said: ‘If you were going to go on a fiscal spending spree, the markets are telling you that this is the time to do it.’

Sunak twice referred to the agenda championed by Prime Minister Boris Johnson, calling plans to create skilled, low-carbon jobs in the North and Scotland as ‘levelling up in action’.


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