As major fiscal announcements go, Budget 2021 is shaping up to be the most important for a generation.
No doubt commentators said the same of Alistair Darling’s speech in March 2009 or George Osborne’s the following June.
But Rishi Sunak’s big moment is of an altogether different magnitude.
When he stands at the dispatch box in the House of Commons tomorrow, he does so against a backdrop of an economic crisis, which has broken all records and changed our understanding of the depths a recession can plumb.
The UK economy took its biggest hit for 300 years last year, with GDP contracting by a record 9.9 per cent year-on-year.
In the month of April 2020 alone, GDP shrank by an estimated 20.4 per cent – many times higher than any previous month on record.
Government borrowing to try and mitigate the impact of these historic declines has put more strain on the UK public finances than at any time since the Second World War.
The national debt stands at £2.14 trillion as of January, which as a proportion of GDP is 97.9 per cent – the highest since the financial year 1962/63.
Public sector net borrowing (the deficit) in the first 10 months of this financial year (April 2020 to January 2021) is estimated to have been £270.6 billion.
The Office for Budget Responsibility’s (OBR) November forecast was that this could rise to £393.5 billion by the end of March, although this does seem a little high now.
Whatever the final figure ends up being, it will be at least five and probably six times higher than the deficit in the financial year 2019/20.
The spending spree has seen more than 50 new Government support schemes launched, most notable among them the Coronavirus Job Retention Scheme (CJRS) also known as furlough.
Another factor behind the ballooning deficit is the high number of tax incentives that have been introduced to stimulate activity in the economy.
The business rates relief holiday, VAT cut for hospitality businesses and stamp duty holiday for properties up to £500,000 have all been necessary but costly all the same.
Looking ahead to the Budget, it’s expected that most of the existing support schemes will be maintained for the hardest hit sectors until such a time that the economy has fully reopened.
But on taxation, the signals coming from the Treasury have been difficult to read.
On the one hand, the stamp duty land tax holiday that has supported the housing market and seen it outperform the wider economy over the last year is expected to be extended.
At the same time, it has been mooted that the personal tax allowance is not going to rise from its current level (£12,500) and that corporation tax – the tax companies pay on their profits – could be hiked from 21 per cent to 23 per cent or even 25 per cent.
Business groups will likely wince at any signs of support being tapered, but in the back of the Chancellor’s mind is the need to get Britain’s public finances on a more sustainable footing.
However, while few would disagree that the current fiscal position is untenable, now is not the time to be tightening the purse strings.
The economy is still paralysed by the national lockdown and many companies will be staring down balances sheets that are every bit as frightening as the Chancellor’s Exchequer.
Any major changes to the business landscape at this stage, from either a tax or stimulus point of view, could risk pushing many firms over the edge.
On the jobs front, which is the biggest concern in terms of long-term economic scarring, the most important thing Rishi Sunak has to do tomorrow is extend furlough.
The most expensive intervention the Government has made during this crisis, the CJRS has been used by a staggering 11.2 million workers since its inception.
Even 10 months after it was first announced in January this year, 4.7 million jobs were being supported by it.
The lion’s share of those were in the embattled retail and hospitality sectors, which have on furlough 939,000 and 1.14 million people respectively.
These are the exact sort of companies that could not withstand any major tax reforms or tapering of support, and therefore Mr Sunak must not let the pursuit of fiscal responsibility get in the way of the recovery.
This has been a historic economic crisis. The Chancellor’s Budget tomorrow is an historic moment. Withdrawing support now would be a historic mistake.