EY UK chief economist: Budget lacks detail

Chancellor Rishi Sunak’s first budget shows promise, but lacks detail and a clear strategy, according to EY UK’s chief economist, Mark Gregory.

The chancellor announced a range of spending commitments over the next five years totalling over £600bn to be spent on roads, housing, rail and broadband, while there was a separate £12bn package to help businesses and the NHS manage the Coronavirus crisis.

“There’s some good things in there, the £175bn on infrastructure, some interesting ideas on R&D, they talked about more money for education and skills. But there wasn’t a lot of detail. So, I left it thinking interesting, but not yet convinced that there’s a real plan in place to implement a lot of these things,” Gregory says.

Gregory sympathises with the government, acknowledging that efficiently implementing drastic measures was no easy task, but believes there is still plenty of detail to be revealed.

“It’s not easy to spend large amounts of money in practice,” he says. “We know we want to spend money, but actually where are we going to spend it – there’s still quite a lot of work to do there.”

The investment spending, by EY’s calculations, is currently around 1.8 percent of GDP and is set to rise to around three percent. It was this which highlighted the need for a clear strategy to manage the investments effectively.

“That’s a 60 percent rise in activity. So, we need quite a clear plan to put that in place. Of the infrastructure budget, probably only about £25bn is specified out of the £175bn. It’s not clear,” Gregory says.

The budget had little immediate effect on stock markets, however. On Wednesday, the FTSE dropped as Sunak delivered his first budget speech, before suffering its worst day since the Black Monday crash of 1987 on Thursday, dropping over 10 percent.

Gregory believes the scale of the Coronavirus crisis, coupled with the potential oil war between OPEC countries and Russia, are overshadowing any of the announcements made by the chancellor.

“If you look at the OBR’s forecasts, their view is that government spending will increase growth in future years. The OBR said it would increase growth by 0.5 percent in the next two years alone. So, in ordinary times, the market would perceive that positively.

“They’d also perceive positively an interest rate cut and the move that the Bank of England made. So, I think you have to probably say at the moment, the market isn’t really reacting to this budget.

“It’s reacting to the other news on Coronavirus, which is kind of happening in a separate place to the budget. That seems to be what’s driving decisions today because actually those stock market moves are being mirrored around the world. So, I suspect it’s a UK specific issue at this point. The budget significant as it is, is actually relatively small in this wider context,” he adds.

Gregory is pleased the government are providing clarity in their response to Coronavirus, with £12bn of the £30bn package to boost the economy aimed specifically at dealing with the virus.

“The £12bn of emergency funding to deal with the consequences of the Coronavirus – that’s pretty clear. I think they see a legitimate role for the government in health, economy and supply to come through the crisis,” Gregory says.