After the Corona crisis, the British state budget should get back on track. Skyrocketing inflation is making this more difficult – and at the same time easier. Chancellor Sunak rightly remains cautious.
A man with a plan: Rishi Sunak is not opening the floodgates to offset inflation.
Some days 5p is worth a lot. When British Chancellor of the Exchequer Rishi Sunak appeared before Parliament on Wednesday to report on the state of public finances, he had to offer something. Sunak offered the British 5 pence, the equivalent of 6 centimes. The tax on fuel will be reduced by this amount with immediate effect, which should make the record high petrol price of 1.78 pounds per liter a little more bearable.
The Minister of Finance was not to be envied. It is his third crisis spring in a row. Rarely has a Chancellor of the Exchequer felt compelled to do the opposite of what he wanted to do so often. Sunak, who likes to emphasize his conservative preference for a lean government and low taxes, had planned significant tax increases in recent months.
Taxes exacerbate inflation
The Corona crisis has thrown Britain’s public finances out of joint. The aid measures for the economy caused the national debt to explode by around 20 percentage points. It is now around 100 percent of gross domestic product (GDP). Sunak, who is often traded as Prime Minister Boris Johnson’s successor, would like to at least restructure the cash register somewhat. Spending cuts are not an option under Johnson.
But high prices mean he has to do it in a hurricane and with minimal visibility. Just hours before Sunak’s performance, inflation was reported to have risen to an unexpectedly high 6.2 percent in February. Prices are rising as fast as they were last 30 years ago. Core inflation, excluding volatile factors such as energy costs and food, is also high. Sunak’s tax increases will take effect at the beginning of April. This will make the situation for British households even more difficult.
Inflation also has an impact on the state coffers – in an ambiguous way: on the one hand, debt service is becoming massively more expensive because the variable interest rates on inflation-indexed government bonds, of which there are many more than before in the rapidly growing mountain of debt, are skyrocketing. In the financial year from April Britain will have to spend four times as much money on interest on debt as before. At the same time, inflation inflates nominal economic output, and with it the debt-to-GDP ratio falls. In relative terms, liabilities are becoming more manageable.
Fleeting leeway
In theory, Sunak even has more fiscal leeway than expected because tax revenue has risen surprisingly recently. The government deficit reached only 5.4 percent of GDP in the past twelve months instead of the expected 7.9 percent. But this leeway can be fleeting, because the uncertainty is enormous. Due to price increases and bottlenecks, the British economy will probably only grow by 3.8 instead of 6 percent in real terms in 2022, estimates the state budget authority OBR.
The risk of stagflation has not been averted. Sunak is pursuing the goal of at least balancing the budget for current expenses in three years. For this he calculates with a safety buffer. That’s right, and it forbids immediately planning any form of leeway. While almost every spending request was granted during the Corona crisis, a sense of proportion is now required.
But the sharp rise in the cost of living, which according to the OBR is weighing on the British as much as it was last in the 1950s, prompted the Chancellor of the Exchequer to make inconsistencies. So he sticks to the long-planned increase in social security contributions – but announces that he will drastically increase the allowance to relieve poorer households. The latter is correct, the former at least debatable. The difficult situation becomes apparent.
Sunak’s intention to draw up plans for a restructuring of the tax system by the autumn gives reason to hope. It is intended to make it easier for companies to invest in equipment and in employee training. Great Britain has had good experiences with this. It remains to be wished that nothing intervenes for a change.
You can visit Benjamin Triebe, Business Correspondent for the UK and Ireland Twitter follow.