The “Spend Now, Tax Later” Budget

Question 1: How will the increase in the corporate tax rate from 19% to 25% affect the UK’s international competitiveness in the medium term?

 

Question 2: To what extent will the “super deduction” aide the UK’s recovery from the Covid recession?

Question 3: Which of the following best characterizes the pace at which the budget addresses UK’s medium term fiscal challenges (deficit and debt)?

Summary

The majority of the CfM panel of experts on the UK economy thinks that the super-deduction for corporate investment announced in the spring budget will moderately aid the UK’s recovery from the Covid recession, but that the announced corporate tax increases will do moderate harm. Most panelists believe that the government is moving too fast on deficit reduction.

Background

The March 2021 CfM survey asked members of its UK panel of experts about tax, spending, and deficit-reduction measures in the spring budget.

The spring budget                                                          

With nearly a third of the UK population having received at least one dose of a vaccine, there is light at the end of the Covid-19 tunnel. Still in partial lockdown, challenges remain for both the public health and the economy. Chancellor Rishi Sunak’s March 3rd spring budget announcement reflected these two realities. On one hand, the budget extended and expanded expenditure measures aimed to insure and boost the UK economy this year and next. On the other hand, the Chancellor announced increases in both personal and corporate taxation in later years in an attempt to address the deficit that is likely to remain after the pandemic and to help stabilize public debt. The Guardian referred to this as the “spend now pay later” budget and the Financial Times similarly called it the “spend now tax later” budget.

In the short run, the 2021-22 budget allocates an additional £43 billion to extend previously enacted measures aimed to support households and businesses. (Figures from the Office of Budget Responsibility, OBR.) These include the Coronavirus Job Retention Scheme, which provides financial support to businesses that have furloughed employees and was extended for 6 months to September 2021. The self-employed income support scheme and the universal credit uplift of £20 per week were similarly extended. Business tax rates relief for retail, hospitality, and leisure sectors will also continue. The stamp duly holiday will begin to phase out from July 2021.

The budget also allocated £12 billion for a capital investment “super-deduction”, with an additional £13 billion estimated for the following fiscal year. The super-deduction allows companies to deduct 130% of expenses on capital on most investments on plant and equipment. At the prevailing corporate tax rate, this is effectively a 25% government subsidy on qualifying investments. The OBR chair evaluates that the super-deduction “provides a very strong incentive to bring investment forward from future periods, supporting economic recovery over the next two years.” Martin Wolf, writing in the FT, agrees, but emphasizes that “At most, this will bring investment forward” and argues that capital allowances should have been made permanent. Peter Spencer, Paulo Santos Monteiro and Peter Smith concur that the super-deduction merely removes the incentive to postpone investment due to the scheduled increase in corporate tax rates (giving higher tax payments from which to deduct investments).

Overall, the spending measures come to more than £50 billion or around 2.5% of UK GDP. While this figure is large, it is substantially smaller than the US stimulus passed this month, at $1.9 trillion or nearly 9% of US GDP, and most of which reflects assistance to households.

In the longer run, the Chancellor announced several tax measures to address the public deficit and debt. The corporate tax rate will rise from 19% to 25% in 2023, bringing the UK closer to the G7 average of 27%, but above the OECD average of 22%. It comes close to reversing Chancellor George Osborne’s corporate tax cut from 28% to its current rate and is the first time in 40 years that corporate tax rates will have increased. The existing 19% tax rate will still apply to businesses with profits below £50,000. The government predicts that this measure will raise £17 billion or 0.6% of GDP. Personal income taxes will also bear a part of the burden, with the personal allowance frozen at $12,570 and the threshold for the 40% tax rate remaining at £50,270 until 2025-26. This measure will raise an estimated £8-9 billion a year, because of rising incomes.  

Overall, the budget has received mixed reviews, as one might expect from a large policy shift. The Resolution Foundation posits that the Chancellor largely got it right: “the big picture is more support in the next few years and then tax rises later in the decade. That’s the right approach, but the Chancellor is taking some big risks.” The Institute for Fiscal Studies says the budget does a good job in providing continued support to the economy, but is vaguer on how longer-term budgetary and economic (e.g. inequality) challenges will be addressed. Jagjit Chadha agrees that the budget is unclear on what it is attempting to achieve in the long run or how: “Are we trying to nurture growth, level up, level across, or just get public debt down to 40% or less of GDP?” Jonathan Portes argues that the Chancellor was insufficiently bold and overly focused on deficit reduction in the medium term: “The Government can and should spend what is needed to restore our public services and address the legacy of poverty and deprivation left by the past decade, compounded by the pandemic; and at the same time finance its commendable ambitions to ‘level up’ and decarbonise the economy… When and if this spending results in persistently higher inflation, then higher interest rates and tax rises will indeed be necessary. This is a gamble we can afford to take.”

This month’s survey contains three questions, one on the tax side, another on the expenditure side, and the third on the debt and deficit.

Question 1: How will the increase in the corporate tax rate from 19% to 25% affect the UK’s international competitiveness in the medium term?

18 panelists responded to this question. There was a clear majority (61%) that thinks that the increase in corporate taxation would have a moderately negative effect on the UK’s international competitiveness. An additional 11% thought the damage would be large and 22% that there would be no damage.

Panelists who thought the corporate tax increase would be damaging pointed to the contractionary effect of corporate taxation in a globalized economy. Jagjit Chadha (National Institute of Economic and Social Research) argues that the damage would be large, pointing to NIESR research showing that “raising corporate taxes have larger contractionary impact on the economy that either of VAT or income taxes.” David Miles (Imperial College) also believes there are “better ways to raise revenue, for example by a revamp of housing taxation.”

Nevertheless, most panel members thought the damage would be moderate, because of the multitude of factors affecting international competitiveness. As Charles Bean (London School of Economics) puts it: “The corporate tax rate is but one factor that affects companies’ location decisions. Factors such as the stability and reliability of the legal environment, the cost and availability of appropriately skilled labour, the connectedness of transport systems, the height of international trade barriers, etc., are equally important. So the picture needs to be considered in the round.” Further, Costas Milas (University of Liverpool) argues that “the rest of the world will also have to raise its corporation tax to tackle the rising COVID-19 debt.

Brexit was on several panel members’ minds. Francesca Monti (King’s College London) had thought that “lower corporate and personal income taxes would have been part of the UK government's strategy to reverse, to some extent, the damage inflicted by Brexit on the economy.” Thorsten Beck (Cass Business School) and David Cobham (Heriot Watt University) both thought the corporate tax increase would have no effect because its effects would be swamped by the larger damage caused by the UK’s exit from the EU.

Question 2: To what extent will the “super deduction” aid the UK’s recovery from the Covid recession?

18 panel members responded to this question. Nearly all respondents (83%) thought the super-deduction would aid the recovery moderately. An additional 6% thought it will do substantial harm and the remainder expected it to have no effect. The consensus reflects a broad agreement that the super-deduction will cause firms to bring investments forward. Participants gave a variety of reasons why the effects would be merely moderate.

First, several argued that the super-investment deduction was a drop in the bucket when compared to the challenges the UK faces. Wouter den Haan (London School of Economics) believes that “very few things if any will have a truly significant effect on the recovery.” Charles Bean argues that “the dominant determinant of the pace of the recovery will be the speed at which consumption recovers as the health restrictions are lifted.”  Thorsten Beck adds that “Brexit uncertainties work against it and will certainly offset a large part of the [super-deduction’s] positive effect.”

Second, bringing forward investment may harm longer term growth and thus have limited impacts. Martin Ellison (University of Oxford) claims that this is merely “rearranging the deckchairs on the Titanic.” Michael Wickens (Cardiff Business School and University of York) adds that bringing investment forward “is however at the expense of longer term investment when the super deduction ends. I would prefer keeping the super-deduction and leaving open its end date.”

Third, some argued that the investment acceleration would help the recovery only insofar as it improved employment or business confidence. Panicos Demetriades (University of Leicester) opines that the super-deduction will “bring investment forward… That will no doubt expedite the recovery, but unless it creates many new jobs, it will not make a substantial difference.” Jagjit Chadha adds that “The key objective will be to create sufficient confidence or sense of future profitability across sectors and regions, which may need somewhat more than a tax break. But it is a start.” Simon Wren-Lewis (University of Oxford) isn’t optimistic given the firms that are most likely to benefit, viewing the deduction as “a large transfer of funds from the public sector to companies that mostly did well out of the pandemic, with marginal benefits.”

Question 3: Which of the following best characterizes the pace at which the budget addresses UK’s medium term fiscal challenges (deficit and debt)?

18 panel members responded to this question. The panel was nearly evenly split between the 44% that see the budget as reducing deficits too rapidly and those that think the budget reduces deficits at the right pace. Not a single panel member thinks that planned deficit reductions are too slow.

Panelists who viewed the pace of deficit reduction as too rapid cited poor economic performance and low interest rates as important considerations. Francesca Monti opined that “The UK has a poor performance in terms of productivity compared to many advanced economies and it is also facing the Brexit shock. These factors could warrant fiscal stimulus for longer than what is implied in the current budget.” Wouter den Haan added that “in this continued low interest rate environment, the UK shouldn't worry about paying back the debt soon.” Simon Wren-Lewis directly argued that the spring budget inappropriately focused on deficit reduction: “Sunak has failed to learn from the US example. What should have been a budget for enhancing the recovery, greening the economy and helping those most badly hit by the pandemic. Instead it was a budget largely about reducing deficits. A clear indicator of Sunak's failure is that the OBR expect Bank interest rates to be 0.5% or less when fiscal consolidation starts. Osborne's failure is being repeated, with the only difference being a focus on tax rises rather than spending cuts.”

On the other hand, panelists who viewed the pace of deficit reduction as just right focused on the importance of fiscal balance, and the potential for policy adjustments to be made in the future. Michael Wickens commented that: “The main issue is the extent to which removal of lockdown will generate a large increase in activity. It is too soon to know. Therefore, a later budget would have been better. In the meantime, doing little is probably the safest course. In the longer term it will be necessary return to something like fiscal balance. With a strong bounce-back after lockdown and a longer-term framework, this could remove any need for tighter budgets.” Charles Bean also highlighted the necessity and flexibility of deficit reduction measures: “So putting in place a (contingent) plan to close the deficit and put the debt-GDP ratio onto a falling trajectory over the medium/long term while providing continued fiscal support in the near term strikes the right balance in my view. The tax and spending measures necessary to stabilize the public finances can then be adjusted appropriately in the light of how the economy evolves over the next few years.”

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How the experts responded

Question 1

Participant Answer Confidence level Comment
David Cobham's picture David Cobham Heriot Watt University No effect Confident
What will dominate is Brexit, one way or the other.
Martin Ellison's picture Martin Ellison University of Oxford Moderate damage Confident
International competitiveness rests on many factors, only one of which is the corporate tax rates. There may be some negative signalling (“Britain is not open for business”) that contributes to the post-Brexit malaise. More importantly, the small yield of corporate taxes means the proposed change will only have a minor impact on fiscal sustainability.
Francesca Monti's picture Francesca Monti Kings College London Moderate damage Confident
I thought that lower corporate and personal income taxes would have been part of the UK government's strategy to reverse, to some extent, the damage inflicted by Brexit on the economy. The increase in corporate taxes would instead exacerbate the issues around international competitiveness created by Brexit. On the other hand, I guess it lends some credibility to the government's commitment to as much fiscal prudence as these unusual times permit, which could be beneficial by creating a more stable and certain economic environment in the future. On balance, these two effect could cause damage, but not necessarily very large.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Moderate damage Confident
Thorsten Beck's picture Thorsten Beck Cass Business School No effect Confident
I do not think that a higher corporate tax rate will be a first-order factor in the UK's competitiveness in the medium-term, compared to other more important factors. Most importantly, the exit from Europe's Single Market and Customs Union and the ongoing conflict with the EU will have bigger negative effects on competitiveness, both in certain areas of manufacturing as in large parts of the service sector.
Panicos Demetriades's picture Panicos Demetriades University of Leicester Other, or no opinion Confident
A 6% increase in corporation tax is significant, however the tax rate is only one of many factors that determine international competitiveness. The business environment, human capital, access to new technologies and markets, and the overall tax regime as much more relevant. At worst, the increase in the corporate tax rate could reduce inward FDI if and when it is fully implemented. Given political and economic uncertainties, it will have no immediate impact.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Large damage Confident
If we put on one side the complications brought about by the temporary super-deduction on investment in plant and machinery, which will tend to bring forward investment by firms showing a profit, an increase in corporate tax does not support the UK's international position on competitiveness after exit from the EU. Our own analysis at NIESR (https://www.niesr.ac.uk/sites/default/files/publications/UK%20outlook%209%20feb.pdf page 15) suggests that raising corporate taxes have larger contractionary impact on the economy that either of VAT or income taxes so the increase in the tax if permanent may not be very helpful. I suspect we need to view the higher tax rate alongside tax break for investment rather than in isolation: they form a joint strategy.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Moderate damage Not confident
But marginal compared to the damage caused by Brexit
David Miles's picture David Miles Imperial College Moderate damage Confident
The UK will move from a somewhat below average tax country for corporates to a somewhat above average tax country. Whether this is a good way to raise revenue is unclear - in part because its incidence is far from obvious. Better ways to raise revenue - for example by a revamp of housing taxation - have not been used.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Moderate damage Confident
If by international competitiveness is meant attractiveness to foreign investment in the UK then it is mildly discouraging but does not make the UK too different from other competitor countries. If is meant the price competitiveness of UK goods and services then it could be more damaging as it discourages investment in the UK in the longer term.
Roger Farmer's picture Roger Farmer University of Warwick Moderate damage Confident
The US is contemplating a similar corporate tax increase. This is unlikely to cause major shifts in location of businesses particularly as tax rates remain within the bounds of similar countries.
Natalie Chen's picture Natalie Chen University of Warwick No effect Not confident
Wouter Den Haan's picture Wouter Den Haan London School of Economics Moderate damage Confident
It isn't a great thing in itself but it is relatively unimportant in the big picture especially during these quite chaotic challenging times.
Linda Yueh's picture Linda Yueh London Business School No effect Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Moderate damage Not confident
The corporate tax rate is but one factor that affects companies location decisions. Factors such as the stabilty and reliability of the legal environment, the cost and availability of appropriately skilled labour, the connectedness of transport systems, the height of international trade barriers, etc., are equally important. So the picture needs to be considered in the round.
Lucio Sarno's picture Lucio Sarno Cambridge University Large damage Confident
Costas Milas's picture Costas Milas University of Liverpool Moderate damage Confident
Corporate taxation affects business investments and, consequently, both UK’s productivity and international competitiveness. UK business investments depend on the spread between the UK corporate tax rate and the corporate tax rate in the rest of the world. At 19%, currently, the UK corporation tax is well below the OECD average of 23.39% (https://stats.oecd.org/index.aspx?DataSetCode=Table_II1). From my econometric calculations, an increase in the UK corporate tax rate by six percentage points (assuming no change in the corporation tax for the rest of the world) will reduce UK business investments by a massive 16.8% in the (medium to) long run. This will apply to the larger 10% firms in the UK so the long-run negative impact of business investments will not be as bad as initially feared. That said, the problem is here is that the larger firms are, in fact, the ones most likely to invest. On the other hand, the rest of the world will also have to raise its corporation tax to tackle the rising COVID-19 debt. Put everything together to conclude that international competitiveness will face (through the hit in business investments) a moderate damage in the medium run.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Moderate damage Not confident

Question 2

Participant Answer Confidence level Comment
David Cobham's picture David Cobham Heriot Watt University Moderately Confident
But there's a lot of other things going on too.
Martin Ellison's picture Martin Ellison University of Oxford Moderately Confident
There will be some effect as investment plans are brought forward, but there’s a feeling of “rearranging the deckchairs on the Titanic”. It may be that bringing investment forward uses up investment opportunities from the future. Summers (2017) (https://www.journals.uchicago.edu/doi/pdf/10.1086/690245) seems to be making this argument when he says “[t]o some extent, low rates work to stimulate demand by pulling investment forward. So today’s reduction in interest rates reduces tomorrow ‘s neutral rate by pulling forward investment”. It suggests that the super reduction may reduce R* in the future.
Francesca Monti's picture Francesca Monti Kings College London Moderately Confident
I agree with Martin Wolf and Peter Spencer, Paulo Santos Monteiro and Peter Smith. The super-deduction merely gives an incentive to bring investment forward, rather than postponing it in order to set the expense against the higher tax rate that is expected in 2023.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Substantially Confident
Thorsten Beck's picture Thorsten Beck Cass Business School Moderately Confident
The UK is struggling with two shocks - the pandemic recession and the uncertainties of the post-Brexit economy. While the super deduction might help pull forward investment into the short term and thus speed up economic recovery, the Brexit uncertainties work against it and will certainly off-set a large part of the positive effect.
Panicos Demetriades's picture Panicos Demetriades University of Leicester Moderately Very confident
It will certainly bring investment forward, as other economists have said. That will no doubt expedite the recovery, but unless it creates many new jobs, it will not make a substantial difference.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Moderately Confident
Providing an incentive to bring forward firm investment is a good idea. But it will not help start-ups or firms that are struggling from the impact of Covid and EU exit. They key objective will be to create sufficient confidence or sense of future profitability across sectors and regions, which may need somewhat more than a tax break. But it is a start.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Moderately Confident
It will bring investment forward, but that means less investment from year 3 of the recovery (see OBR analysis). So a large transfer of funds from the public sector to companies that mostly did well out of the pandemic, with marginal benefits.
David Miles's picture David Miles Imperial College Moderately Confident
It will bring forward some limited amount of investment to the near term when a boost to demand and supply potential is probably needed most.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Moderately Confident
It will bring investment forward and so quicken the recovery from Covid. This is however at the expense of longer term investment when the super-deduction ends. I would prefer keeping the super-deduction and leaving open its end date with the possibility of not ending it or tapering it depending on the state of future aggregate demand.
Roger Farmer's picture Roger Farmer University of Warwick Moderately Confident
This is a welcome move that will partly offset the increase in corporate taxes.
Natalie Chen's picture Natalie Chen University of Warwick No effect Not confident
Wouter Den Haan's picture Wouter Den Haan London School of Economics Moderately Very confident
I chose moderately because very few things if any will have a truly significant effect on the recovery. But this seems like a sensible plan especially to prevent firms from postponing investment given the reduction in the corporate tax rate.
Linda Yueh's picture Linda Yueh London Business School Moderately Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Moderately Confident
The generous super deduction will strongly encourage businesses to bring forward investment projects (it will also shift some marginal projects into profitability), though the magnitude of that intertemporal reallocation effect is highly uncertain. However, the dominant determinant of the pace of the recovery will be the speed at which consumption recovers as the health restrictions are lifted.
Lucio Sarno's picture Lucio Sarno Cambridge University No effect Not confident
Costas Milas's picture Costas Milas University of Liverpool Moderately Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Moderately Not confident
The super deduction will largely remove the cliff-edge created by the increase in corporate tax rates and may further accelerate investment in the short run. However, the corporate sector will exit the pandemic with substantial debt overhang and the question is whether more generous tax deductions for investment will be able to avert this drag on investment.

Question 3

Participant Answer Confidence level Comment
David Cobham's picture David Cobham Heriot Watt University Reduces deficits too rapidly Not confident
Well, the danger is that it does this. But there's many a slip twixt cup and lip.
Martin Ellison's picture Martin Ellison University of Oxford Just right Confident
To borrow terminology from epidemiologists, for the debt to GDP ratio to fall it needs its R number to be below 1. This can be done by running budget surpluses or through nominal GDP growth. The OBR forecast a gradual decline in the debt to GDP ratio before the pandemic in March 2020 (so at the time R<1), and I see little reason why we would not return to R<1 once tax receipts rebound alongside GDP and acute health spending on the pandemic subsides. Nominal GDP will gradually chip away at the debt to GDP ratio so there is no pressing need to run large budget surpluses.
Francesca Monti's picture Francesca Monti Kings College London Reduces deficits too rapidly Not confident
The UK has a poor performance in terms of productivity compared to many advanced economies and it is also facing the Brexit shock. These factors could warrant fiscal stimulus for longer than what is implied in the current budget.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Just right Not confident
Thorsten Beck's picture Thorsten Beck Cass Business School Reduces deficits too rapidly Confident
The UK has entered the pandemic with a rather tight fiscal stance (and at the end of a 10-year austerity period), eased over the past 12 months. While long-term fiscal consolidation is certainly a laudable objective, it seems too early to even take first steps towards this objective (as done with personal income tax), given the continuously high public health and economic uncertainty.
Panicos Demetriades's picture Panicos Demetriades University of Leicester Other, or no opinion Extremely confident
It is a largely pointless exercise to make the Conservative Government appear fiscally prudent. It is questionable whether their measures, especially the rise in corporation tax, will have much of an impact on the deficit. With inflation low and incomes not rising the same can also be said about the personal taxation measures. In any case, the emphasis now should be on the recovery and only if and when that recovery is fully and robustly in place, the Chancellor should start to be concerned about the deficit. With the right support measures, in fact, the ensuing growth and job creation could well be budget neutral. In a deep recession, fiscal multipliers are well above unity. Now is an opportunity for smart public investments that should not be missed.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Reduces deficits too rapidly Confident
The OBR has a relatively optimistic short run projections with over 11% cumulative GDP growth in 2021 and 2022 but rather emaciated growth for 2022, 2023 and 2024 (1.7, 1.6, 1.7), which suggests that we may be in danger of planning somewhat of a tighter fiscal policy that we ought with a forecast of a return to a balanced current budget by 25/26. Given low costs of borrowing, we really can afford to take some time to help the economy adjust and provide more support for labour market transitions.
Patrick Minford's picture Patrick Minford Cardiff Business School Reduces deficits too rapidly Very confident
Just as after wars the UK has taken a long time to reduce the debt/GDP ratio, doing so via growth in nominal GDP, so it should do now. Indeed given the need to reinforce growth, taxes should rather be cut, so raising growth, which would boost tax revenues and so pay off debt.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Reduces deficits too rapidly Extremely confident
Sunak has failed to learn from the US example. What should have been a budget for enhancing the recovery, greening the economy and helping those most badly hit by the pandemic. Instead it was a budget largely about reducing deficits. A clear indicator of Sunak's failure is that the OBR expect Bank interest rates to be 0.5% or less when fiscal consolidation starts. Osborne's failure is being repeated, with the only difference being a focus on tax rises rather than spending cuts.
David Miles's picture David Miles Imperial College Other, or no opinion Confident
The decline in the deficit is not projected to happen quickly. That is almost certainly sensible but poses risks. No one can feel confident of the ability of the UK government to issue debt at such favorable rates several years down the road. Having to continue to issue a great deal of new debt for years to come is therefore inevitably a risk.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Just right Confident
The main issue is the extent to which removal of lockdown will generate a large increase in activity. It is too soon to know. Therefore a later budget would have been better. In the meantime doing little is probably the safest course. In the longer term it will be necessary return to something like fiscal balance. With a strong bounce-back after lockdown and a longer-term framework, this could remove any need for tighter budgets. If the government had issued perpetuities then no tightening would have been required. Are the government missing the boat? As, soon, interest rates will rise making this strategy too expensive. Why hasn't the Chancellor ever discussed this option?
Roger Farmer's picture Roger Farmer University of Warwick Just right Not confident
Time will tell.
Natalie Chen's picture Natalie Chen University of Warwick Reduces deficits too rapidly Not confident
Wouter Den Haan's picture Wouter Den Haan London School of Economics Reduces deficits too rapidly Confident
I chose too rapidly mainly because I want to signal that in this continued low interest rate environment, the UK shouldn't worry about paying back the debt soon.
Linda Yueh's picture Linda Yueh London Business School Just right Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Just right Confident
The long-term damage to the economy and the public finances from the pandemic ('scarring') is still highly unclear but it is likely that some fiscal consolidation will be required in the medium/long term. So putting in place a (contingent) plan to close the deficit and put the debt-GDP ratio onto a falling trajectory over the medium/long term while providing continued fiscal support in the near term strikes the right balance in my view. The tax and spending measures necessary to stabilize the public finances can then be adjusted appropriately in the light of how the economy evolves over the next few years.
Costas Milas's picture Costas Milas University of Liverpool Other, or no opinion Confident
About (rather than just) right...
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Just right Confident
I am not concerned about the levels of public debt, but certainly, the UK cannot borrow at the current rate forever and the OBR predicts some permanent damage to public finances. It was correct not to increase taxes in the upcoming two years and it is sensible to provide some clarity on the way the budgetary gap will be closed in the medium term. I put a high probability on further adjustments down the road as uncertainty abounds. But I do find it useful that the government has provided clarity on the types of measures it might take should deficit reduction prove desirable or necessary. On the measures themselves, I would have preferred to see more progressive tax measures on the personal income tax side.