Budget 2021: economic analysis

05.03.21

By Andrew McPhillips, Chief Economist at the Northern Powerhouse Partnership

On the surface, this week’s Budget appeared fairly innocuous. Many immediate measures were welcome: the extension to furlough until restrictions are (hopefully) lifted, as well as an (albeit temporary) extension to the £20 uplift for Universal Credit.

Tax rises will not be immediate either. The freezing of the thresholds for income tax will begin next year for five years, while corporation tax increases are delayed for two years. Measures including the extension to business rates relief and the lower VAT rate in the hospitality sector will reassure those businesses hit hardest by the pandemic.

A ‘super deduction’, which allows businesses to reduce their tax bill when spending to invest, is another good idea. It may just bring forward investment from later years rather than increasing total investment – but a boost to economic activity in the near term is what is really needed right now.

Of more interest to many here in the North, however, was the news of an economic campus by HM Treasury in Darlington and a new UK Infrastructure Bank in Leeds. Not only will these incentivise more businesses into ‘Northshoring’, it is a positive step to see a sizeable chunk of decision-making move out of the Whitehall bubble.

However, as the dust began to settle, eyebrows were raised over the criteria used to award funding to ‘level up’ a number of towns and cities across the country. Firstly, £1bn from the Towns Fund was allocated to 45 places across the country with the majority of awards in the £20-£25m range. There are two major problems with administering funds such as these. The first is to resist the temptation to try and give everybody a piece of the pie. The second is how to justify who receives funding and who doesn’t.

Many places that won funding were those you’d expect to see – particularly if you spend time looking at local economic data. A large number were in the so-called ‘Red Wall’, made up of ‘left-behind’ areas where economic disadvantage is high.  Many of these constituencies voted Conservative for the first time at the last General Election – which, in part, explains why there was such a sizeable majority of successful areas served by Conservative MPs. It does not explain, however, the five Conservative areas, scored as ‘low priority’, which were still allocated funding.

But where Rishi Sunak faces greatest pressure is on the Levelling Up Fund, a near £5bn fund to invest in high priority infrastructure projects. The Budget ranked each local authority according to need, from Priority 1 (greatest need) to Priority 3 (lowest need). For some bewildering reason, the Treasury did not release the methodology used to prioritise areas – promising it would follow ‘shortly’.

This again left the Chancellor open to claims of playing politics with the allocations. His own relatively affluent Richmond constituency was placed in Priority 1 when others such as Barnsley and Salford were placed in Priority 2. This detracted from an otherwise positive announcement about significant investment into northern regions. 

Leaving aside the arguments about who is receiving what, we are still some way off having a coherent plan for devolution. We’re yet to see the long-promised government white paper on how power and funding could be put in the hands of local leaders, who know where it can be used best. Concerns that levelling up is no more than a soundbite are not helped by continuous delays to important announcements on the future of transformative projects such as the Eastern leg of HS2 and Northern Powerhouse Rail.

Building a successful, productive Northern Powerhouse will not happen without a plan for structural change and devolution. Let’s hope we see it at the next fiscal statement in autumn.