Spring Budget 2021 Checklist - Capital Economics
UK Economics

Spring Budget 2021 Checklist

UK Economics Update
Written by Ruth Gregory

This checklist helps clients keep track of the key economic and public finances forecasts announced during the Chancellor’s Budget speech at 12.30pm on Wednesday 3rd March and to provide some instant context. We will send a Rapid Response and a Focus after the speech.

  • This checklist helps clients keep track of the key economic and public finances forecasts announced during the Chancellor’s Budget speech at 12.30pm on Wednesday 3rd March and to provide some instant context. We will send a Rapid Response and a Focus after the speech.

Possible New Measures for 2021/22

Spending Rises

Cost (£bn)

Spending Cuts

Yield (£bn)

£1,000 Job Retention Bonus

6.0

Freeze pension lifetime allowance

0.3

Extra funds for the NHS (inc. £1.65bn for vaccine rollout)

5.0

More stringent terms for business loan schemes

“Restart grants” for non-essential retailers from April

5.0

Extend £20 a week Universal Credit uplift for 6 months

3.0

Extra funds for schools

0.7

Extend furlough scheme to end-June

0.5

Extend the government’s loan schemes deadlines

Tax Cuts

Tax Rises

Reduce employer NICs by 1ppt

6.2

Rise in corporation tax from 19% to 20%

2.0

Extend business rates relief to end-July

3.9

Freeze income tax thresholds

6.0

Extend VAT cut for hospitality, tourism until end-July

1.3

Restricting pension tax relief for higher earners?

10.0

Extend stamp duty holiday until end-June

1.0

Aligning capital gains tax with income tax?

14.0

Delay start of deferred VAT payments

Possible Totals

32.6

32.3

Source: Capital Economics

Economic & Fiscal Forecasts

GDP Growth (%)

2020

2021

2022

2023

2024

2025

Comments

Spring Budget 2021

____

____

____

____

____

____

The OBR will incorporate the better outcome for GDP growth in 2020 and may revise up its near-term economic forecast due to the speed and efficacy of the vaccine rollout. Its medium-term growth forecasts will probably remain largely unchanged.

OBR Mar. 21 (CE est.)*

-9.9

4.2

7.0

2.3

1.7

1.8

OBR Nov. 20 (Central)

-11.3

5.5

6.6

2.3

1.7

1.8

Bank of England (Feb.)

-9.9

5.1

7.2

1.3

Consensus

-10.2

4.6

5.5

2.3

1.9

1.8

Capital Economics**

-9.9

5.2

7.2

2.2

1.8

1.7

Return to pre-virus peak (Q4 19)

Peak unemp. Rate (%)

GDP vs. pre-crisis trend+ (%)

The 2020/21 budget deficit is only a concern if the crisis results in a permanent reduction in GDP, such that the deficit is persistently higher. So the key question is whether the OBR retains its downbeat view that the economy will be 3% smaller than its pre-pandemic trajectory by 2026. We suspect that it will.

Spring Budget 2021

____

____

____

OBR Nov. 20 (Central)

Q4 22

7.5

-3.0

Bank of England

Q1 22

7.8

-1.8

Capital Economics**

Q1 22

6.5

0.0

PSNB ex. (£bn)

20/21

21/22

22/23

23/24

24/25

25/26

If the OBR continues to forecast a budget deficit of about £102bn in 2025/26, then taken at face value, this implies that if the government wants to get the deficit back to pre-virus levels of £57bn, then it might have to tighten fiscal policy by about £45bn a year.

Spring Budget 2021

____

____

____

____

____

____

OBR Mar. 21 (CE est.)*

360

175

103

101

100

102

OBR Nov. 20

394

164

105

100

100

102

Capital Economics**

370

175

70

45

35

35

Net Debt (% of GDP)

20/21

21/22

22/23

23/24

24/25

25/26

The OBR will probably continue to predict that public debt will climb to a peak of 109% of GDP in 2023/24 and stay above 100% for the next five years.

Spring Budget 2021

____

____

____

____

____

____

OBR Mar. 21 (CE est.)*

104

107

108

109

104

104

OBR Nov. 20

105

108

109

109

105

105

Capital Economics**

107

108

106

104

97

95

*Capital Economics expectation of Spring Budget 2021 forecast. **Assumes that severe COVID-19 restrictions are in place during January, February and March, that restrictions are eased gradually in April, May and June and few restrictions are required beyond June. (See here.) +Q1 2024 BoE, Q1 2026 OBR.

Sources: Capital Economics, Bloomberg, HMT, OBR


Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, ruth.gregory@capitaleconomics.com