Rarely has there been more uncertainty regarding the course of the public finances over the next five years. In this note we aim to answer some of the big questions for the economy in light of the 2021 budget.

  1. What is the outlook for the public finances? The pandemic and the largest recession in over 300 years are likely to leave lasting scars on the economy and the public finances. Further ahead, pressure for new spending is only likely to rise.
  2. What has the chancellor announced? Support for the recovery is the priority for this year. Further ahead, tax rises have been pencilled in through higher rates of corporation tax and the freezing of income tax thresholds.
  3. Is now the right time to tackle the debt? The chancellor has embraced the broad economic consensus that governments should borrow to support demand in the short-term. However, it is not too early to start thinking about the longer-term sustainability of the public finances.
  4. How could the chancellor close the deficit? The political appetite for austerity has waned leaving tax rises as the likely tool for any adjustment. By committing not to raise income tax, national insurance or VAT, the chancellor may need to look to other taxes to raise revenues.
  5. Whatever happened to fiscal rules? The pandemic has blown the last set of published fiscal rules well off course. However, the chancellor did offer some clues as to his guiding principles for stewardship of the public finances.
  6. What has changed since the global financial crisis? Following a sluggish recovery from the last crisis, a sea-change in economic thought has led to a radically different response to that seen after 2008.
  7. What happens if interest rates rise? Despite the increasing stock of public debt, the cost of financing it has fallen since the start of the pandemic. However, as the chancellor was keen to stress, even small rises in interest rates could have significant consequences for the public purse.
  8. What about other scenarios? The likely fiscal adjustment needed in the years ahead rests on the unusually uncertain outlook for the economy. The Office for Budget Responsibility set out three scenarios for the economy and the public finances.
  9. Will we see a permanently larger state? Previous crises and wars have left a legacy of larger government. The COVID-19 pandemic is unlikely to be different.
  10. How do the government's spending plans fit with levelling up and the transition to net zero? Before the pandemic, the government stated its goal to tackle climate change and reduce regional inequalities. Increased capital investment and a new infrastructure bank may further its ambitions in these areas.

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