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UK budget: Coronavirus, Brexit are double whammy for economy

Even the best-laid plans can go awry. Rishi Sunak's first budget as the UK's chancellor of the exchequer was supposed to pave the way for an economic "golden era." Then COVID-19 happened, forcing Sunak to change tack.

In untroubled times the presentation of a budget is a fairly mundane affair and likely to cause eyes to glaze over. However, throw a couple of major spanners in the works, and the fiscal foundation starts to show some cracks.

That's the dilemma facing Rishi Sunak, the UK's chancellor of the exchequer (the equivalent to the role of finance minister in other countries), as he prepares to unveil his budget on Wednesday.

Sunak's task looks formidable. On the one hand, the UK government wants to fulfill its electoral promise and launch an economic renaissance by setting aside funds for a massive public spending spree on everything from infrastructure projects to health, education and communications. On the other hand, realities on the ground in the form of COVID-19 and Brexit may curtail those lofty ambitions.

Coronavirus budget?

Sunak has been forced to hastily rewrite his budget plans as a result of the coronavirus outbreak. He's promised that the already beleaguered National Health Service (NHS) will get extra cash to counter the effects of the impact, including funds for test centers at hospitals and to purchase testing kits. 

Rishi Sunak, the UK's chancellor of the exchequer

Rishi Sunak has been thrown in the deep end as he tries to cope with the economic fallout of COVID-19 and Brexit

Money is also being set aside for doctors' offices, which are expected to come under intense pressure as the virus spreads.

Read moreThe NHS and Brexit: Don't get sick in the UK

Jonathan Portes, professor of economics and public policy at King's College in London, says despite the uncertainty it's incumbent upon the government to present a sensible set of policies.

"What that means is announcing now that the government is ready to do whatever it takes to support the economy. If the impact of COVID-19 shuts down businesses and reduces demand, the government must provide short-term support," such as small-business loans and incentives to boost consumer spending.

Notwithstanding the growing uncertainty, Portes says it's crucial that the chancellor and the government acknowledge that the disease could have a substantial impact but that they have a grip on the situation. "The government should say 'we understand that and we are prepared to do whatever it takes. We have a bunch of policy options and we're working on them now.'"

Brexit is not the litmus test

The other elephant in the room is Brexit. Preparations to leave the EU have already cost the taxpayer £4.4 billion (€5.1 billion, $5.7 billion). In total £6.3 billion have been set aside to cover the costs, taking into account the possibility of a no-deal Brexit.

That scenario could scupper Prime Minister Boris Johnson's vision for a new economic dawn. Some forecasts predict that the UK could be mired in a period of stagnation over the next 10-15 years, with growth averaging little more than 1% per year.

Infografik UK Wirtschaftslage 2020 EN

Portes, who has also served as the chief economist at the cabinet office, is slightly less gloomy about the road ahead. "I am less worried than some people are about the short-term disruption of a no-deal outcome, simply because we've had quite a long time to prepare for it. There really shouldn't be any reason for big queues at Dover or food shortages in the shops, which we might have been worried about last March."

Johnson has made it abundantly clear that he sees Brexit as a spark to "unleash Britain's potential" that will herald the start of a "golden era."

Right now though, says Portes, Brexit is not the main litmus test of the upcoming budget.

"It's now, in the short term, showing that the government has got a grip on the possible economic consequences of COVID-19."

Policies, not polemics

The other priority, according to Portes, is to show that the government "actually has some substance and money behind the leveling up [reducing the gap between the UK's richest and poorest regions] rhetoric."

Read more: Britain's Brexit bounce fantasy jars with dour economic consensus

Indeed, the government badly needs this budget to send the signal that it's finally batted the failed austerity doctrine out of the park and with it the school of thought that economic performance would improve by cutting the quantity and quality of public services.

That, says Portes, will require substance over style. "The government has to show that [its plans] are not just fluff and political nonsense. That there is real policy beyond reopening a few rail lines, cutting a few ribbons and the sort of big projects that Johnson loves to announce."

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