The Chancellor of the Exchequer will set out his Budget proposals on Wednesday, against a more problematic and uncertain economic and public finance background than has been the case for any of his predecessors. In addition to the continuing and still unpredictable impact of the Covid pandemic, it is increasingly clear that Brexit is having a steadily worsening impact on UK economic prospects, adding markedly to the downside risks.

In this Budget it is even more important than is usually the case that Chancellor Rishi Sunak (with the crucial help of the Office for Budget Responsibility) takes a measured view of the alternative scenarios; and considers the way forward for the short, medium and longer term. He must plan his strategy with great care. Then the Scottish Government can develop policies from where he leaves off.

For the short term the priority must be securing recovery across key sectors, and minimising the inevitable rise in unemployment, as Covid-related support measures are eased and the Brexit effect intensifies. Looking to the medium term it is essential that we see a return to productivity growth (after the worst decade for productivity in 150 years); and encourage both business investment and (critically) skills development for those seeking a return to the labour force and those seeking work for the first time after a disrupted end to their education. For the longer term it will be essential to offset the marked increase in inequalities that has developed over the past year.

Before considering issues related to the public finances, it is time for a quick update on the overall economic outlook. Globally there are encouraging signs as vaccination programmes pick up pace. This increased positivity is evident from the latest purchasing managers’ indexes in Europe and the USA. But the UK is lagging, not yet back at the neutral level of 50, while the USA has shot up to 58.8. The problem in the UK is manufacturing, primarily related to falling exports – for Brexit-related reasons. This is in direct contrast to the story in the EU and US.

But – good news – even in the UK the data point to businesses planning to recruit more employees, and make fewer folk redundant. This suggests that the increase in unemployment in the second half of 2021 could be less than feared. However, the Chancellor should still extend his schemes for employment protection, albeit on a more targeted basis.

Planning the public finances will be a major challenge. We are already anticipating an annual deficit in 2024/25 of £150 billion, five per cent of gross domestic product and double the pre-pandemic level. That would be associated with a debt to GDP ratio of 100% – the highest since the late 1950s.

But there is some good news regarding this debt. Interest rates remain at all-time low levels, and hence debt interest as a percentage of Government revenue would still be as low as it has been for 300 years! But please note one caveat. A high share of this debt is short term, so any pick up in interest rates – for example due to concerns about inflation –could rapidly and significantly add to debt service costs.

However, inflation should not be a cause for significant concern. The consumer prices index remains below 1%, compared to the Bank of England target of 2%. The CPI could pick up during 2021, in part due to Brexit-related costs, but must be expected to remain well below target for two or three years. So there should be no risk of interest rate hikes, indeed rate cuts and even negative rates look possible.

In the November 2020 spending review, cuts in public expenditure of £12 billion were planned. That now looks increasingly unlikely - and inappropriate. For a start a major boost to education spending will be essential. The UK Government’s announcements to date are miniscule compared to one estimate that it will cost £30 billion to offset the loss of half a year’s schooling for so many. Then massive extra funds will be needed for the NHS, to deal with the backlog of “normal” health issues and to ensure that the UK is properly prepared for the next pandemic.

Funds will also be required for new strategies for the short, medium and longer term. Taking the short term first, the Chancellor must continue household support schemes beyond their planned March/April end dates. This must be alongside the extension, on a targeted basis to the sectors still suffering most, of some business support measures.

Looking to the medium term encouraging private investment and deploying public investment will also be essential, but with a focus on areas likely to bring longer-term benefits. The Institute for Fiscal Studies has highlighted human capital (training et al), science and technology and productivity-promoting infrastructure. The human capital issue comes top of my list. There will be major changes in the types of skills sought post Covid and Brexit. Labour supply has to develop to match this evolving demand. The last thing we wish to see in 2021 and 2022 is a major increase in unemployment alongside growing numbers of vacancies which cannot be filled. Decades back I worked for two or three years in the Manpower Services Commission. Maybe an up-to-date version of the MSC is required now.

Even with success in relation to investment, productivity and skills there remains a major challenge to offset enhanced post-pandemic inequalities. The youngest and poorest have suffered most. Two initial thoughts here; first the uplift in universal credit has been of real significance, adding income of £80 per month for six million families. That uplift should be made permanent. In addition to working to reduce inequalities this would also stimulate demand for goods and services just when needed. Second, some tax rises look inevitable and these must be targeted at the upper end of the income and wealth spectrum. Even a Conservative Chancellor must see that this makes sense!