James Olney James Olney

This week’s Budget will provide an early, but problematic fork in the road for Boris Johnson’s budget. Set against the backdrop of Sajid Javid’s departure, it will be an important test for the new Chancellor and a demonstration of the control that Number 10 has managed to achieve over the Treasury.

At the heart of the issue is a contradiction of the Conservatives’ own making. Key to the victory in the 2019 election was the collapse of the Red Wall in the Midlands, with previously staunch Labour communities lending their vote to the Tories for the first time.

Fiscal rectitude vs levelling up

Victory in the next election will be defined by Johnson’s success in his ambition to ‘level up’ the country. Much of this is expected to be delivered via an expansion in spending to fill the cracks that have become evident in public services in the last few years. This includes everything from boosting funding for the NHS, funding the recruitment of 20,000 new police officers, and a £100bn investment in infrastructure.

To the layman, this new funding looks like one mass increase – but there are subtleties. The most obvious is that the former commitments are increases in expenditure on services, and the latter is a capital investment.

The sensible argument for an investment boost of £100bn into infrastructure is that many underlying issues enforcing the North-South divide across almost every metric is maintained by, if not exacerbated by, the discrepancy in investment nationally. With interest rates low, it would make financial sense to borrow now to invest in projects at a minimal long term cost to the public purse. Better connections to and around the North from the South would stimulate investment and enterprise, and the £100bn spend would itself serve as a huge injection into the economy, ultimately generating increased tax revenues and recouping the value of the investment.

However, while simply increasing spending on day-to-day services may increase the quality of public provision in the short term, without any accompanying tax rises there will need to be an increase in borrowing to fund regular expenditure, with no prospect of any meaningful economic growth to pay down the initial investment (as would happen with capital infrastructure investment).

The triple lock challenge

The challenge is that the Tories promised a triple lock on taxes in their manifesto – no rises to Income Tax, National Insurance or VAT. But without generating more revenue, the Government is going to have to increase borrowing to fund these promised increases. Although a spending splurge would make many of their new voters happy and prop up their political position, it would put the Conservatives at risk of breaking the fiscal rules that they set in their own manifesto and damage market confidence. It would also degrade the capacity to react to any economic emergency, with the OBR recently warning that with so much of the hard won budget surplus already committed by Javid in September, any economic downturn is likely to eliminate the margin before Johnson has even begun to pump out big capital spending increases.

Boosting spending via borrowing is not a natural thing for the Conservatives to do. The former Chancellor was known to be reticent, and had worked hard to cultivate a reputation as a traditional fiscal conservative whose core aim was to balance the books. This tension between Number 10’s political priorities (tied to Johnson’s desire to consolidate the recent electoral success) and the Treasury’s fiscal priorities (tied to the Chancellor’s political image) was a source of the tension between the two.

Northern vs Southern Toryism

The Conservatives have, in trying to please everyone, found themselves in a Catch 22 of their own making. The Northern Tory vote demands a spending increase, but the Southern Tory vote does not want any tax rises. Something has to give, unless the Government is prepared to act in a fiscally irresponsible fashion, and in doing so tarnish its reputation in both the North and the South and damage the economy in the process.

Sajid Javid didn’t go quietly to the backbenches either, and has set out the plans that he had for the Budget – which include a 2% cut to the basic rate of income tax (which is now politically and economically untenable) – and gifted his successor with a political millstone around his neck. There is a lot of pressure on Sunak to pick a side, and the outcome on Wednesday will go a long way to signal what kind of Chancellor he will be.

A Coronavirus budget?

The Government is also now facing a genuine crisis in the imminent arrival of the coronavirus pandemic. The public health response to the disease transcends political squabbles, with the Prime Minister ordering the reduction of the statutory sick pay threshold, the Conservatives ending their political boycott of the Today programme, and Labour agreeing with the Conservatives in the Commons for the first time in what feels like a decade.

With every department being asked to prepare their contribution to the public health response, it may not be sensible to commit in the Budget to spending increases in pursuit of political objectives when a global slowdown has already begun and a recession seems imminent. With few fiscal levers left to deal with an economic downturn, and with a pandemic now upon us, it may be that a lot of assumptions in the Treasury that were taken as a given last Monday may now be completely redundant.

Coronavirus will certainly factor in to Sunak’s calculations for Wednesday – and there is already speculation that the £100bn infrastructure  investment has been postponed to retain capacity for emergency health spending. So far, the Government has indicated that there are no bespoke economic measures being considered– but as the crisis develops this will not be sustainable. Inaction could risk the collapse of whole sectors of strategic importance to the UK, and public services like the NHS, police and potentially the armed forces will require additional funding to deliver their core public safety functions.

This Budget will therefore serve as the endnote to a political struggle played out over the last year and an indication of the newly emboldened Conservative Party’s fiscal approach for this Parliament.