Sunak Pushes Review of U.K. Fiscal Goals to Later This Year

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U.K. Chancellor of the Exchequer Rishi Sunak has punted a decision on what rules will govern his tax and spending decisions until the Fall.

Ahead of his Budget next week, what’s clear is that the coronavirus is wreaking havoc on the economy and the priority is to buttress jobs. Sunak promised a review of the fiscal framework in his first budget last March, saying he would consult “widely with a range of experts” before reporting back in the fall.

But the pandemic proved deeper and longer than ministers expected, and the autumn budget was canceled. As things stand, the chancellor won’t announce new fiscal rules on March 3, a person familiar with the matter said.

Those criteria matter because they signal to markets how the government will manage the public finances and Sunak considers it his “sacred” duty to leave them in good shape for future generations. His task is to rein in a budget deficit that’s ballooned because of the 300 billion-pound ($422 billion) cost of tackling the outbreak so far.

“He has to indicate some general guidelines as to what will be his fiscal rulebook going forward,” Norman Lamont, a former Conservative chancellor, said in an interview this month.

Cuts

For now, Sunak will wait.

The next opportunity to set out a new fiscal framework will present itself around the time of the next Budget, said the person, who spoke anonymously about next week’s spending blueprint. Nevertheless, the chancellor will address head-on the longer-term need for fiscal restraint on Wednesday, according to the person, who suggested there may be some measures unveiled to raise tax or cut spending.

The person pointed to last year’s spending review, when Sunak cut overseas aid and froze some public sector pay as evidence the chancellor is prepared to take some steps to control the deficit.

Given the uncertainty, investors are unlikely to punish Sunak for the delay in unveiling new fiscal rules. It remains to be seen how deeply the economy will be scarred by the crisis, which will determine the extent to which tax rises or spending cuts are needed at some point down the line.

However, markets will ultimately want to know his precise targets for bringing down the deficit and stabilizing a debt load now at 100% of GDP for the first time since the early 1960s. The government owes more than 2 trillion pounds, leaving it exposed to any significant increase in interest rates.

It came as:

  • The Times newspaper reported Wednesday that Sunak is preparing to extend a holiday on stamp duty -- a tax on home purchases -- by three months until the end of June, without saying how it obtained the information
  • Some 26 Conservative members of Parliament wrote to the chancellor urging him not to raise fuel duty in the budget, in a letter seen by The Sun newspaper
  • Millions of self-employed workers will be offered grants of up to 7,500 pounds but the program could be dropped from May, the Daily Telegraph reported, without citing anyone

Hammond’s Rules

Bond yields have been rising in recent days amid expectations that the Bank of England will refrain from providing more stimulus as the economy rebounds strongly from the crisis.

Since 1997, successive governments have set fiscal rules as a way of reassuring investors that the public finances are not being neglected. Most of those have been broken or scrapped by Conservative administrations publicly committed to prudence -- “austerity” became a term associated with Tories.

The pandemic chaos means that rules set by then-chancellor Philip Hammond in November 2016 still formally stand. Those require among other things that the structural deficit is kept below 2% of gross domestic product in 2020-21. The overall deficit is set be approaching a fifth of the economy.

The Tories outlined new rules ahead of the 2019 general election, when Sajid Javid was chancellor, to allow for extra investment in infrastructure. However, they were never written into the Charter for Budget Responsibility.

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