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Looking into the Budget tea leaves

Looking into the Budget tea leaves

Ciaran Gunne-Jones 05 Mar 2020
​See Lichfields' "Budget 2020 - getting it done" Economic outlook for  reactions and analysis of Rishi Sunak's first Budget speech.  Rishi Sunak’s ministerial red box was already overflowing when he took office last month – handed the keys to Number 11 at short notice following the resignation of Sajid Javid – and it has been a tumultuous three weeks since. With coronavirus now weighing down heavily on the global economic outlook, the early tetchy stages of the UK’s negotiations with the European Union on future trade underway, and speculation of interest rate cuts later this year, the Chancellor may well be turning to his preferred brand of Yorkshire tea leaves for guidance.   Given the macroeconomic uncertainties, HM Treasury officials are reported as saying that next week’s Budget will be the first installment in a “trilogy” of statements this year – something for the aficionados to relish. Some decisions on tax, spending and borrowing are likely to be pushed back to the autumn, a year after last November’s Budget was itself postponed due to the general election. However, the Budget is one of the key set pieces of the parliamentary calendar, and is particularly important in the context of a new government keen to deliver quickly on its manifesto promises. So what might the Chancellor’s red box hold in terms decisions on planning, infrastructure and regional economic policy? Here’s a round-up of 10 key points to look out for next Wednesday: Economic growth – tea leaves aside, the Office for Budget Responsibility (OBR) – the independent fiscal watchdog – will publish its latest UK economic forecasts alongside the Budget. It is widely expected that the OBR will downgrade their forecasts from those published in March 2019. This matters because it would result in higher forecasts for government borrowing and, in theory, give less bandwidth to increase public spending if the Chancellor also wants to limit tax increases in line with manifesto commitments. ‘Levelling up’ – the phrase that featured prominently in the Conservative election campaign, and is already permeating into the policy sphere (seemingly replacing the ‘rebalancing’ lexicon which became popular in the Osborne and Hammond eras). The Queen’s Speech in December referred to making investments, “in order to unleash productivity and improve daily life for communities across the country.” Following success in breaking the so-called ‘Red Wall’ in the North and Midlands, the government have been clear that levelling up will be a key factor in all future policy and decision-making, so we can expect this theme to be writ large. Practically, this could extend to creating a new hub for HM Treasury officials on Teesside. Revisions to the Green Book – the ‘Green Book’ (HMT’s guidance for appraising public spending decisions) was an unlikely media star over the quiet Christmas news cycle when it was reported that significant revisions are in the works aimed at boosting investment in the North and Midlands. We considered the implications in an earlier blog. The Budget will provide an opportunity for the Chancellor to set out the details on how this will work in practice, but clarity about how decisions on local infrastructure spending will be decided will be keenly sought from both north and south. Devolution White Paper – government has committed to publishing a Devolution White paper, promising a review of more directly elected mayors in the mould of the Metro Mayor, and the possibility of more combined authorities and unitary authorities. These policies reflect wider effort to devolve decision-making to the local level. The future of sub-national partnerships such as the Northern Powerhouse, Midlands Engine and Oxford-Cambridge corridor will also depend on any funding and powers devolved to them over the next few years. Planning White Paper – in the works since being first announced by Theresa May in March 2019, and now anticipated around the time of the Budget or shortly thereafter. A recent Ministerial Written Answer confirmed, “the purpose of the White Paper will be to make the planning process clearer, more accessible and more certain for all users, including homeowners and small businesses. It will also address resourcing and performance in Planning Departments.” It remains to be seen what influence Jack Airey’s (co-author of Policy Exchange’s report in January on ‘Rethinking the Planning System’ for the 21st Century’) recent appointment as No. 10 housing and planning adviser will have on policy proposals. Local Industrial Strategies – Mayoral Combined Authorities and Local Enterprise Partnerships (LEPs) across the country have been busy preparing their local response to the national Industrial Strategy since 2018 through the form of Local Industrial Strategies (LIS). So far, seven LIS have been agreed and published but some thirty remain in the pipeline still to be agreed with central government. At the very least, an extension to the deadline for nationwide coverage by March 2020 seems inevitable – or potentially a shift to something different as has been rumoured. The Budget could usefully provide some clarity. Big infrastructure – the recent confirmation of HS2 might signal that the government is moving towards funding big ticket infrastructure investment, relaxing its fiscal rules. Eyes will be on the Budget to see whether this is backed with investment for Northern Powerhouse Rail and an indication on the future of the Oxford-Cambridge growth corridor. A further indication of the priorities of this government might be its omission of major road investment announcements (so far transport infrastructure spending announced has been for trains, busses and cycling), but this will need squaring with the legally-binding target of net zero greenhouse gas emissions by 2050. Research and development – in the spirit of levelling up, the Prime Minister and his Special Adviser Dominic Cummings are looking closely at R&D funding nationally, pointing out that more than half of the national gross domestic expenditure on R&D is spent in London, the South East, and East of England. This might be through investing into nationally-significant hubs like the “MIT for the North” and the Midlands “Gigafactory”. Options include strengthening the existing Catapult Centres, National Productivity Investment Fund and Strength In Places funds, or through new initiatives. UK Shared Prosperity Fund – further detail on the plans to replace the £2.1billion EU structural and investment funding, the proposed UK Shared Prosperity Fund, is long awaited. A consultation period is expected before the fund kicks in. While the fund is committed to tackling inequalities between communities by raising productivity in areas of the country that are ‘furthest behind’, clarity is needed to ensure local authorities have certainty over long term funding arrangements in order to effectively plan for future interventions. Freeports – a key policy for government, given the aspirations for global trade following Brexit. They will operate similarly to enterprise zones but specifically for port areas, in which goods are only charged tariffs when they leave the freeport area. With a 10-week consultation recently launched by the Government aims to announce up to 10 new freeports across the UK at the end of this year to be operating in 2021. The Budget provides the Chancellor with the opportunity to say more about the potential funding and regulatory framework for this initiative. With a promised dose of new public spending, a significant parliamentary majority and a new phase of Brexit and global macroeconomic developments, next week’s Budget will be significant not just for the decisions made but how this sets the tone for policy and funding for the years ahead. Lichfields will be providing further comment on the Budget in due course. Click here to subscribe for updates (opens in email) Image credit: Rishi Sunak (@RishiSunak)  

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Mind the gap: bridging the growing North South divide
Boris Johnson has wasted no time in setting to work on his election pledge to increase investment in the North of England and Midlands, in a bid to boost economic growth and prosperity within some key first-time Tory constituencies. As widely reported by the press over the Christmas break, it is understood that HM Treasury could make wholesale changes to the way in which public investment is allocated to key economic growth interventions across the country, with value for money and economic appraisal assessments (as guided by the Treasury’s ‘Green Book’ guidance for nearly half a century) recast to focus explicitly on boosting economic wellbeing in the North and Midlands. This could affect future national government investment decisions in a range of transport, infrastructure and business growth projects, shifting the focus away from national economic growth outcomes (and overall scale of economic benefit) towards reducing inequality and the ‘productivity gap’ between northern and southern England. Further detail is expected in the Spring Budget – but on the face of it, these proposals could have a significant impact upon the spatial distribution of government resources and funding available to stimulate and encourage economic growth. The economic (and political) rationale is clear. The UK’s ‘economic divide’ – the disparity between the least and most productive parts of the country – is growing according to the latest regional output data released by ONS in December. The data shows that the gap in productivity (measured in terms of economic output or GDP per person) between the UK’s richest region (London) and the poorest (North East) widened last year, and that London’s share of, or contribution to, the national economy has increased at the expense of other regions (see Figure 1). Figure 1: Share of UK GDP at current prices Source: Financial Times Online, based on data from ONS The statistics underline the scale of the productivity challenge facing the new Conservative government, which prompted publication of the UK Industrial Strategy just over two years ago. This calls for all parts of the country to boost their economic contribution to UK plc, by drawing on their distinctive economic strengths, competitive advantages and growth opportunities (as summarised in a previous Lichfields blog). UK regional inequality is amongst the worst in the developed world and is a problem that successive governments have been grappling with for many years. Stark disparities in economic performance across the country, as shown in the map below, have become a familiar trend. Figure 2: Workforce productivity by local authority in England (2018) Source: Experian 2019 / Lichfields analysis Rightly then, the issue has been attracting increasing political attention over recent months and years, reinforced by the work of independent initiatives such as the UK2027 Commission, which calls for a long-term plan to tackle regional inequality and a national renewal fund along the lines of Germany’s East-West reunification strategy. Commission Chair Lord Kerslake’s keynote address at the recent Institute of Economic Development Conference referred to the UK being at a ‘turning point’. The Commission’s First Report published last year described previous government action to tackle inequalities across the UK as underpowered ‘pea shooter’ and ‘sticking plaster’ policies – too little and too short-lived. The report argues that if we are really to shift the dial on spatial inequalities, what we require for the future will need to be, “structural, generational, interlocking and at scale”. This begs the question: can the deliberate targeting of public investment away from London and the wider South East in itself help to bring about or instigate the structural shift needed? The proposals will no doubt be welcomed by many, but arguably need to be accompanied by a more holistic policy framework that is clear about how each part of the UK can play a complementary role in driving forward productivity improvements and genuinely inclusive growth. Indeed, the latest ONS output statistics identify some concerning trends within parts of the country that have traditionally performed well, such as the South East region which recorded zero per capita growth last year (Figure 3). The South West also recorded sluggish levels of growth, while the West Midlands (an area that could benefit from this ‘rebalancing’ investment) outstripped London in terms of per capita growth. There are also significant disparities within regions that can be obscured through use of broad regional measures, for example the presence of deprived coastal communities in the South East. As ever, there are clearly some spatial nuances at play. Figure 3: Annual % change in output by region (2018) Source: Financial Times Online, based on data from ONS We can expect a lot more coverage and comment on this topic between now and the Spring Budget, where the devil may well be in the detail.

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