Some previous Chancellors have struggled to have their place in the sun. Gordon Brown famously developed the pre-budget report to stamp his authority in the House of Commons and help broaden the Treasury’s reach right across Whitehall. Of the many problems faced by Rishi Sunak over the past year, this has not been one.
Today’s budget was effectively his seventh budget over the past year – with two formal budgets and five very substantial support packages all of which would have amounted to budget-scale expenditure in normal times.
Just a year ago, the Chancellor pledged to ‘do whatever it takes’ to get the economy through the Covid crisis. At the time, when we were all just learning to wash our hands a bit more, few would have foreseen the vast levels of public expenditure and government interventions that would have been required. Few had heard of the term ‘furlough’ let alone imagined the incredible concept of a Conservative Government stepping in to massively subsidise millions of workers’ wages or provide support though CBILS and BBLS, VAT cuts and business rates holidays. At the same time, we have seen vast emergency funding to public services such as the NHS and schools, the mass purchasing of PPE, test and trace and the vaccine rollout. On top of this the economy has shrunk and tax receipts have withered away.
Today’s budget laid bare the costs of this double whammy of spending increases and tax losses with the Chancellor setting out soaring debt levels not seen since the 1960s.
But this largess is not to end here. Paving the road to recovery in a three part plan today ‘to protect jobs and livelihoods’, further massive expenditure was announced across a range of measures. Business rates relief was extended for eligible businesses until June. The Coronavirus Job Retention Scheme will be extended to September. VAT cuts for hospitality will continue and an extensive package of Restart Grants for some sectors were also announced. The importance of the housing market to the UK economy was underlined with the extension of the stamp duty holiday to June and the provision of 95% mortgages to help first time buyers, reminiscent of the previously much criticised ‘help-to-buy’ scheme.
Whilst those businesses eligible for support will wholeheartedly welcome these much needed packages, these decisions will not have been taken lightly by a highly conservative and, by instinct, small-state Conservative Chancellor. They lay bare and at the same time exacerbate the perilous state of Britain’s economy which will suffer a profound scarring effect from the Covid pandemic.
Once the country emerges from the fourth lock-down we may-well see that many businesses will not. Right across the economy those who have not been able to access support will have shut their doors for good. When furlough finally does end, many see themselves not returning to work but looking for work and children who have not been in school will be impacted by the loss of learning for years to come.
In the short-term economists seem sanguine about the health of the nation’s financial outlook, but if Sunak thought the last year was tough – he ain’t seen nothing yet with many of the most difficult decisions on restoring the economy still to be made. Not only will he need to withdraw the country’s financial life-support but taxes will also need to go up – though not on the main revenue raisers of income tax, VAT and National Insurance, which are ruled out-of-bounds by the Conservative manifesto.
A few signals of the pain ahead were set out today. Risking the wrath of the Tory right Corporation Tax is set to rise to 25% and personal tax thresholds will be frozen.
Overall, the challenge for the Chancellor was, firstly, to walk the economic tight-rope between restoring the public finances and providing the foundations to kick-start the recovery of the huge economic reconstruction that is required to rebuild after Covid. And, secondly, as a potential Prime Minister in waiting, the political challenge was to ensure spending levels are sustained with the commitment to maintain the levelling-up agenda to appeal to so called ‘red wall’ seats, whilst keeping taxes low to appease the vociferous Tory right.
Today Sunak carefully managed to walk this line, but with question-marks over the speed and extent of the economic bounce-back and potential new Covid variants lurking in the background, the future of the economy, like that of Sunak himself, remains firmly in the balance.
Round-up of the key announcements
Economic and fiscal state of play
- Economy has shrunk by 10% and 700,00 people have been made unemployed
- Office for Budget Responsibility forecasts the economy will grow by 4% this year, recovering to pre-Covid levels by the middle of 2022
- The cost of borrowing is £355 bn, which is 17% of the national income. Borrowing forecasted to decrease to £234 bn in 2022, which is 10.3% of GDP.
Measures for economic survival
- Furlough Scheme and Self-Employed Income Support Scheme to be extended until September.
- Universal credit uplift of £20 a week will continue for another six months. The National Living Wage to be increased to £8.91 from April
- Restart Grant Scheme – £5bn fund to help High Street shops and hospitality firms recover. Non-essential retail eligible for grants up to £6000. Personal care, gyms and other businesses more impacted eligible for grants up to £18,000
- Stamp Duty Land Tax relief will be extended until 30th June. There will be a tailored approach until the end of September. Normal rates will return in October. Mortgage Guarantee Scheme to help first-time buyers with 5% level of deposit
- Business rates relief – 100% business rates holiday until the end of June for eligible retail, hospitality and leisure businesses. There will be 66% relief for the rest of the year worth over £6 billion in 2021-22.
- VAT rates – Temporary reduced VAT rate for hospitality and tourism extended until 30th September. After that, they will return to an interim rate of 12.5% for another 6 months.
Tax measures to balance the books
- Corporation tax – From April 2023 the rate of Corporation Tax paid on company profits will increase from 19% to 25%.
- 130% Super Deduction – The Government wants to stimulate business investment by offering companies a cut in their taxes by up to 25p for every pound they invest in qualifying new plant and machinery assets.
- Personal Tax, Inheritance Tax and Pensions Lifetime Allowance thresholds frozen.