Rishi Sunak’s fiscal announcements: in at the deep end

19 Mar 2020

By Miles Gibson

Rishi Sunak, the new Chancellor of the Exchequer, is arguably the man for whom the phrase ‘thrown in at the deep end’ was invented. His first Budget, published last week, promised a substantial increase in spending, tax cuts, and £30bn of emergency spending to tackle the spread of COVID-19, while the Bank of England cut rates to historic lows.

If that wasn’t deep enough, the speed of the spread of the virus has forced the Chancellor this week to announce even more radical measures, including business loan guarantees to the value of £330bn and further tax cuts.

Only time will tell whether this selection of weapons was the right one, and the UK stock market didn’t react positively to them. But the good news is that many of them are ‘tried and tested’ from the years following the 2008 financial crisis. When speed is paramount, you need off-the-shelf solutions ready to go. Loan guarantees strike me as a particularly smart move, because the Treasury only pays for the bad debt – it’s not giving the loan itself. The evidence from previous mass loan guarantee schemes is that they are well targeted and cost-effective. The Help To Buy Mortgage scheme, for example, gave over £16bn of loans from 2013 to 2016 but has cost the Treasury just £120,000 so far. With high employment and low inflation, the UK economy is otherwise in reasonably good shape, even if a bit shaken by Brexit, and all it really needs is confidence and a massive overdraft. The Treasury providing the latter will hopefully help with the former.

The Budget says that the Treasury will increase capital spending from 2% to 3% of GDP in the next two years – the maximum that the Government’s self-imposed fiscal rules will allow. This is good news. Some of that capital investment will itself be in real estate (such as hospitals, schools and offices) and some in infrastructure improvements which facilitate real estate activity. For example, transport improvements will unblock new development sites.

That does assume, of course, that the Treasury is actually able to get this money spent. The last time it was attempted (when Gordon Brown was Chancellor, 1997-2007), departments simply did not have the capacity to get the money out of the door at the rate proposed, leading to big underspends. You only have to look at HS2, which was proposed more than a decade ago, to see that the bigger the project, the longer it takes. Smaller road improvements and social housing turn out to be among the quickest items.

Away from the big fiscal boost, this was actually a relatively empty Budget from a real estate perspective. Normally a fair few pages of the Budget document are devoted to a new(ish) housing and planning package, but not on this occasion. Most notable was the publication of the terms of reference for the fundamental review of business rates promised by the Conservative Manifesto. It will be a useful exercise, though the context for that review has radically changed already. Hopefully Sunak will have come up for air by the time he announces its conclusions in the Autumn.

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