Budget 2021: Ian McConnell: Vaccine success puts wind in Sunak sails, but Chancellor omitted some key points in speech

That is not to say the backdrop is easy – it is very far from it. However, the OBR is now forecasting a much faster return to pre-pandemic levels of output than it was previously – by the middle of next year in its projections published yesterday – and it sees the peak in unemployment being much lower than it had feared.

Mr Sunak, as a politician, perhaps not surprisingly seemed at pains to portray the Tory response to the pandemic as something of wonder.

While he highlighted the success of the coronavirus job retention scheme, he did not mention how he had persistently refused during last summer and autumn, in spite of widespread pleas, to announce an extension of this programme beyond what was at that time an October 31, 2020 end date. He was eventually forced by circumstances he should have long foreseen to do so, with his dilly-dallying giving employers a major problem in terms of visibility on support and, experts believe, triggering many job losses.

Another thing not mentioned by Mr Sunak in his Budget speech was the OBR’s expectation that “temporary near-term disruption to EU-UK goods trade” would reduce UK gross domestic product by 0.5 per cent in the first quarter of this year. That is a very significant impact over such a short timeframe.

READ MORE: Ian McConnell: Budget 2021 : Can Rishi Sunak ignore inbuilt Tory instinct and avoid past errors?

The Chancellor also tried to tell a story that the Conservatives had done a great job on the public finances prior to the pandemic, giving them the fiscal capacity to act when the crisis came. What he did not mention was that UK public sector net debt stood at £1 trillion when the Tories came to power in 2010, and had risen to £1.8 trillion before the pandemic hit. This was in large part because the Tories’ savage austerity programme was counter-productive, bearing down on growth.

Mr Sunak’s comment about a wish to give businesses certainty was also a bit rich in the context of Brexit and the persistent previous refusal, before his U-turn performed in excruciating stages, to extend the coronavirus job retention scheme.

He has got plenty wrong in his judgment calls on the pandemic, whatever might have been concluded from his speech, but the OBR appeared in its own way to be smiling on him as he brought forward his latest Budget. It had much better figures for Mr Sunak than previously, in terms of the growth and unemployment forecasts on which the Chancellor had to base his Budget.

These less-bleak figures are in large part a result of success in the development of Covid-19 vaccines – such as those pioneered by AstraZeneca and the University of Oxford and by Pfizer and BioNTech – as well as what the OBR described as the “accelerated rollout” of these. The OBR’s latest, mid-2022 projection for a return to pre-pandemic output levels is six months faster than in its central forecast in its previous set of predictions last November.

READ MORE: Ian McConnell: Brexit could have taken many forms. Cheshire Cat Boris Johnson chose this one

It said: “The rapid rollout of vaccines and easing of public health restrictions fuels a more rapid recovery in output to its pre-pandemic levels by the middle of 2022, six months faster than our November central forecast. This is driven by a rebound in consumption as the economy is reopened and given a further boost by a partial rundown of household savings built up over successive lockdowns.”

The OBR also flagged its expectations of a recovery in business investment, partly supported by generous tax breaks unveiled in yesterday’s Budget bringing forward capital expenditure which would otherwise have been planned for future periods.

UK GDP plunged by 9.9% in 2020. The OBR now forecasts growth of 4% this year and expansion of 7.3% in 2022, before expansion cools to respective rates of 1.7%, 1.6% and 1.7% for 2023, 2024 and 2025.

It flags the impact of the faster recovery in output, the extension of the coronavirus job retention scheme and additional fiscal support unveiled in the Budget in helping “limit the further rise in unemployment to below the levels anticipated in our November forecast”. The OBR notes, in its latest forecasts, that the unemployment rate on the International Labour Organisation measure “rises from 5.1 per cent in the fourth quarter of 2020 to a peak of just 6.5 per cent – 2.2 million – at the end of 2021”.

READ MORE: Ian McConnell: Paris metro poster for slapstick British farce evokes Brexit metaphor

It adds that this “represents a rise of 490,000 over the year, but is 340,000 lower and six months later than in our November forecast”. These are utterly grim figures but at least they are not as bad as they were.

Mr Sunak yesterday hammered home his view he must start addressing now the impact of the coronavirus crisis on the public finances.

Rishi Sunak Picture: Stefan Rousseau/PA Wire (Image: PA)

His decision to raise corporation tax to 25% from 2023, from 19%, looks sensible, given this will still be very competitive in a global context but will yield crucial revenue. Major reliefs have been put in for smaller companies, with significant measures to boost investment. And we should bear in mind the main corporation tax rate was 28% when the Tories came to power.

However, the freezing of the income tax personal allowance at the £12,570 level confirmed for the 2021/22 tax year, all the way out to 2026, will have a very significant effect on lower earners. This looks to be exactly what is not needed, given the impact on aggregate demand from effectively raising the tax burden (assuming an inflationary environment and pay rises) on those who have to spend all they have to live.

Mr Sunak made much of slight drops in public sector net debt as a proportion of GDP towards the end of the forecast period. The OBR notes underlying debt peaks at 97.1% of GDP in 2023/24 before falling back to 96.8% of GDP by the end of the forecast period in 2025/26. However, public sector net debt itself continues to rise throughout the forecast period, increasing from £2.198 trillion in 2020/21 to £2.804 trillion by 2025/26.

Public sector net borrowing is expected to be a colossal £354.6bn in 2020/21. It is projected to fall to £233.9bn in 2021/22, before dropping to £106.9bn in 2022/23, £85.3bn in 2023/24, £74.4bn in 2024/25 and £73.7bn in 2025/26.