11 March 2020

Why Rishi Sunak’s Budget won’t mean the end of austerity in all areas

The Chancellor is likely to limit borrowing outside of infrastructure spending and coronavirus response measures.

LONDON, ENGLAND - MARCH 09: Chancellor of the Exchequer Rishi Sunak leaves Downing Street ahead of a government Cobra meeting on March 9, 2020 in London, England. Prime Minister Boris Johnson called a Cobra meeting, named after the Cabinet Office Briefing Room where it takes place, of senior ministers and security officials to coordinate the British government's response to the coronavirus outbreak. (Photo by Chris J Ratcliffe/Getty Images)

Rishi Sunak will announce the biggest expansion in government borrowing in British political history as he approves a slew of infrastructure projects in the Budget today and takes advantage of the era of low interest rates.

And they’re getting lower: the Bank of England has cut its base rate from 0.75 per cent to 0.25 per cent in an attempt to help the economy through a Covid-19 induced shock.

Those two stories illustrate the benefit and the cost of the era of ultra-low interest rates: on the one hand, governments can borrow more than they could in the past. The way that the British government structures its debt means that it may have even greater wriggle room than many other states. But the downside is that when you hit an economic downturn, pretty much all the heavy lifting has to be done by fiscal policy, that is, through tax and spend.

That reality is one reason why Sunak may be wise to avoid too much borrowing outside of infrastructure spending and crisis response measures. For all the talk of ending austerity, and the reality of increased spending on the police, the NHS and education, the story for large parts of the public realm today will be the continuation of spending restraint, rather than its end.