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Missed opportunities in the UK budget to support global development

Written by Mark Miller, Sarah Colenbrander

Hero image description: Rishi Sunak leaves Downing Street to deliver his annual budget in parliament. Photo: Number 10, CC BY-NC-ND 2.0

UK Chancellor Rishi Sunak presented the 2021-2022 budget to parliament yesterday. Perhaps unsurprisingly, the chancellor made no further mention of the planned cuts to the overseas development aid budget, which had been announced at November’s spending review. Despite previous assurances from the Foreign Secretary, there has still been no debate around the required changes to the legislation. The government seems (forlornly?) to be hoping that this issue will simply go away.

As new research by our colleague Annalisa Prizzon shows, cutting aid during this global crisis is a peculiarly British phenomenon. Although information on how the cuts will land has been difficult to come by, reductions to the aid budget are proceeding apace. Monday’s announcement of cutting close to half of the pledges made to Yemen gives a clear indication of the scale of cuts required to hit the revised 0.5% gross national income target. This is not about making changes at the margin, but rather a shock and awe remaking of the UK aid budget.

That being said, the UK’s potential contribution to global development is about much more than the aid target. Fiscal choices made in the ‘national interest’ can also support or undermine collective international goals. How then did yesterday’s budget measure up more broadly?

Expansive support for private investment in recovery

The speed and nature of recovery in G20 countries will have a major bearing on how quickly demand bounces back in poorer economies. While the UK’s economy is clearly not the US or China, its recovery still matters beyond national borders. For instance, the UK’s demand for goods imports from lower- and lower-middle income countries fell in 2020 by close to £5.2 billion relative to 2019.

Last week, the US Treasury Secretary urged G20 countries to continue to take ‘significant fiscal and financial policy actions’ to support the global economic recovery. She stressed ‘if there was ever a time to go big, this is the moment.’ The proposed £60 billion support package announced yesterday (close to 3% of GDP) is certainly not the same relative scale as the $1.9 trillion package being debated in the US (around 9% of GDP). Nevertheless, thankfully there is not the same rush to withdraw fiscal support as in the wake of the global financial crisis.

The type of support matters as well as the scale of support. Much of the US’s support package seeks to address social harms that have arisen from the crisis. For instance, 9% of the US stimulus is aimed at recovering from the gaps in education that have emerged. Efforts to increase the minimum wage (which may not pass) aim to rebalance incomes across capital and labour.

By contrast, the UK chancellor is relying primarily on encouraging private investment to stimulate recovery. The flagship announcement was a large tax incentive worth £25 billion over the next two years aimed at encouraging firms to bring forward planned investments. Proposed freeports also offer a series of regulatory and tax incentives for new investment in certain specific locations. Planned support to rebuild service provision or to address inequalities were notable by their absence. And rising economic inequality in industrialised countries may lead to less solidarity with those born elsewhere.

The chancellor did signal future rises in corporate income tax rates, which are expected rise from 19% to 25% from 2023. In recent years, the UK has been one of the leaders in a ‘race to the bottom’ when it comes to lowering corporate tax rates (25% will still be the lowest rate in the G7). Lower-income countries historically rely on corporate income tax for a larger proportion of total revenue. And so, measures that ease pressures on international tax competition are good news (even if not fully assured that they will come to pass).

A green-ish recovery

The UK is co-hosting the next, crucial round of climate negotiations, where the Paris Agreement will be put to the test. Consequently, there will be global scrutiny of climate-related spending in this budget – particularly as the UK’s recent support for new gas infrastructure and approval of a new coal mine have raised questions about its commitment to net-zero emissions.

The budget consolidates the UK’s climate leadership on many important fronts. Most notably, the chancellor confirmed that the Bank of England’s remit includes the transition to net-zero emissions. Already globally recognised for its pioneering work towards climate-proofing the financial system (from 57:55), this announcement authorises much bolder action to tackle climate-related financial risks through improved monitoring and disclosure. It will also enable the expansion of the supply of green finance through favourable capital and liquidity requirements.

The budget also commits to investing in green infrastructure and a green industrial revolution, with a new development bank based in Leeds to play a catalytic role in mobilising private finance. While there is an unquestionable need to upgrade and decarbonise Britain’s infrastructure, the announcement raised eyebrows among those who remember the short-lived Green Investment Bank – launched in 2012 and sold off in 2016. Of course, a lot has happened since 2016.

There is also much to regret in this budget.

The transport sector accounted for over a third of the UK’s emissions in 2019. Yet the budget freezes fuel duties for the 10th year in a row and the government’s plan to spend £27 billion on roads between 2020 and 2025 continues apace. The unstinting support for cars at the expense of mass transit, cycling and walking is not compatible with the UK’s net-zero targets – but it also carries costs today. Most urgently in the current pandemic, air pollution exceeds legal limits in 75% of urban areas. Exposure to toxic air contributes to chronic conditions such asthma, lung cancer and cardiovascular disease, and increases the risk of dying from Covid-19.

The residential sector accounted for 19% of the UK’s emissions in 2019. While this budget offers generous incentives to decarbonise heat, it actually reduces support to improve building energy efficiency. The housing stock in the UK is old and often poorly constructed, so many people live in cold, poorly ventilated homes. These are expensive to heat whatever technology is used, so up to one in five households have to choose between food and fuel. Low-income households and renters bear the worst impacts. In the midst of a respiratory pandemic where they are required to stay at home, the decision to end the Green Homes Grant effectively abandons people to inadequate and unaffordable housing. This is a crisis not only for the climate, but for people’s health and well-being.

The missing plans for preventing the next crisis

With the UK’s hosting of the G7 summit around the corner, the chancellor also missed an opportunity to set out a clear plan of investment to build the UK’s resilience to future pandemics. An additional £5 million was announced for mRNA-21 vaccine manufacturing as well as £50 million related to vaccine testing. However, given that Covid-19 has caused more than 100,000 deaths, enormous social disruption and cost the exchequer £407 billion, investments to prevent future pandemics would seem to merit much greater attention. A ‘plan for growth’ published alongside the budget statement barely mentions how the UK plans to strengthen resilience to future threats. Hopefully, there is more to come.