RISHI SUNAK must use his upcoming budget to lay the foundations for economic recovery, and start weaning the country off support schemes, leading economists have said.
The Institute for Fiscal Studies (IFS) researchers are to hold an event today setting out the options for the Chancellor ahead of the budget on March 3.
They will argue that rather than restore public finances, Mr Sunak needs to focus on helping the economy recover and adjust to the “new normal” which involves removing government-backed schemes such as furlough.
Researchers are expected to say that while the Chancellor needs to bring in “well-targeted extensions” to emergency support to households and employers, he will also need to start phasing out the financial help to the economy will be unable to fully recover from the crisis.
They are also expected to recommend an extension to the uplift universal credit, which has caused fierce debate in the Commons over recent months.
The group will be joined by an analyst from Citi Research at the online event this morning.
Mr Sunak is due to set out his budget next month, with pressure growing from campaign groups, charities and opposition politicians to keep the £20-a-week increase of Universal Credit permanently.
Analysis by Citi Research states that there is an argument for keeping the uplift, with researchers stating: “Given that basic support for the (childless) unemployed has not risen in 50 years as earnings have more than doubled, and is much less generous than in many comparable countries, there is a case for maintaining this increase.”
Mr Sunak has also been urged to extend the furlough scheme, and provide support to the 3 million people who have so far being excluded.
Paul Johnson, IFS Director said that unless Mr Sunak begins to phase out the state-funded schemes, the economic recovery will be held back.
He explained: “This will be just Rishi Sunak’s second Budget, but his 15th major fiscal announcement. In it he needs to strike a balance between continuing support for jobs and businesses harmed by lockdowns, and weaning the economy off blanket support which will impede necessary economic adjustment.
“Any significant continuation of the furlough scheme must be limited and carefully targeted.
“In the recovery phase he needs to support jobs and investment, but also crucially needs to recognise and address the multiple inequalities exacerbated by the crisis.”
The director added that “substantial” sums would be needed for health, education, justice and local government to help them deal with the “ongoing consequences of the pandemic”.
He added: “Fiscal policy should lean against the effects of looser monetary policy which has again benefited the older and wealthier at the expense of the younger and poorer. And he will need to allocate substantial sums to help the health, education, justice and local government systems deal with ongoing consequences from the pandemic.
“In all this he is facing huge economic uncertainties as the economy adjusts to the triple challenges of Brexit, recovery from Covid and the move to Net Zero. It is possible that that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord.
“But that is not a central expectation: more likely we are on track for ongoing unsustainable deficits. For now, Mr Sunak needs to focus on support and recovery. A reckoning in the form of big future tax rises is highly likely, but not as yet inevitable.”
Researchers are expected to emphasise that Mr Sunak should not rush to implement tax cuts or spending rises unless he is certain that the public are prepared for larger tax rises in future, and will argue that currently public finances are not on a sustainable footing.
Citi Research has modelled several scenarios ahead of the budget, but has stressed that the economic progress and recovery in the UK hinges on when the lockdown can be eased and venues can begin to reopen.
The group’s analysis states that if the vaccine “offers a more complete exit from the pandemic… the economy could reach 1 per cent above its pre-Covid level” by the first quarter of 2022.
However, if there need to be further restrictions brought in this winter, forcing shops and restaurants to close down again, Citi Research predicts the economy would shrink to 8% below what it was prior to the pandemic, by the start of 2022.
Under its central scenario, the analysts have predicted the economy will be 3% down on pre-Covid levels if the virus reduces more gradually throughout this year.