Tax burden set to be highest since the Sixties after Sunak’s Budget
THE tax burden will increase to its highest level for more than 50 years after Chancellor Rishi Sunak set out his plans to begin repairing the nation’s finances after the coronavirus crisis.
Mr Sunak said the pandemic has caused one of the “largest, most comprehensive and sustained economic shocks this country has ever faced” and used his Budget to extend the furlough scheme and Universal Credit increase as part of a £65bn lifeline for the economy as it emerges from the pandemic.
But taxes on business profits are set to be hiked from 2023, while income tax thresholds will be frozen meaning more people will be dragged into paying.
The Office for Budget Responsibility (OBR) said raising the headline corporation tax rate, freezing personal tax allowances and thresholds, and taking around £4bn a year more off annual departmental spending plans would raising a total of £31.8bn in 2025-26.
The measures announced in the Budget increase the tax burden from 34% to 35% of gross domestic product (GDP) – a measure of the size of the economy – in 2025-26, “its highest level since Roy Jenkins was chancellor in the late 1960s”.
Mr Sunak said the total package of measures – including those already announced – to support the economy amounted to £407bn.
But he said the unprecedented spending could not continue and he had to be “honest” about putting the nation’s finances back on a sustainable footing.
The point at which people begin paying income tax will increase by £70 to £12,570 in April, but will be maintained at that level until April 2026, meaning more people will be dragged into paying tax as wages increase.
The 40p rate threshold will increase by £270 to £50,270 and then be frozen.
Mr Sunak said “nobody’s takehome pay will be less than it is now, as a result of this policy”, but he acknowledged it “does remove the incremental benefit created had thresholds continued to increase with inflation”.
Corporation tax will increase from 19% to 25% in 2023.
But a new “small profits rate” will maintain the 19% rate for firms with profits of £50,000 and there will be a taper above £50,000 so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate – around 10% of firms.
There will be a “super deduction” for companies when they invest, reducing their tax bill by 130% of the cost.
While economists have largely agreed that immediate measures to repair the nation’s finances are not needed while the impact of the coronavirus crisis is still being felt, the need for medium-term action was underlined by the OBR forecasts.
Mr Sunak said this year borrowing was £355bn, 17% of national income – the highest level since the Second World War.
Next year it is forecast to be £234bn, 10.3% of GDP, “an amount so large it has only one rival in recent history – this year”.
Mr Sunak added: “Without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely.”
The Budget measures will see borrowing fall to 4.5% of GDP in 2022-23, 3.5% in 2023-24, then 2.9% and 2.8% in the following two years.
Underlying debt rises from 88.8% of GDP this year to 93.8% next year. It then peaks at 97.1% in 2023-24, before stabilising and falling slightly to 97% and 96.8% in the final two years of the forecast.
The Chancellor said the recovery from the economic damage caused by coronavirus will be “swifter and more sustained” than previously thought as a result of the vaccine rollout.
But he warned it would take “a long time” to rebuild and pledged to do “whatever it takes” to support people.
The OBR expects the economy to return to its pre-Covid level by the middle of next year, six months earlier than it previously thought, but Mr Sunak acknowledged that “coronavirus has done and is still doing profound damage”.
Growth next year is expected to be 7.3%, up from 6.6%, but the OBR slashed its GDP forecast for every other year until 2025, including a cut for this year to 4% from the 5.5% growth previously pencilled in.
Unemployment caused by the pandemic is forecast to be lower than expected, peaking at 6.5%, down from 11.9% predicted last July.
Labour leader Sir Keir Starmer said the Budget was a “quick fix, papering over the cracks” but “didn’t even attempt to rebuild the foundations of our economy or to secure the country’s long-term prosperity”.
He accused the Chancellor of trying to revived “failed” policies used by his predecessor George Osborne in a bid to boost the housing market.
SNP Westminster leader Ian Blackford warned that Mr Sunak’s Budget was laying the ground for “more Tory austerity, a decade more of Conservative cuts”.
Responding to Mr Sunak’s Budget speech, Sir Keir told MPs: “The Chancellor may think that this is time for a victory lap but I’m afraid this Budget won’t feel so good for the millions of key workers who are having their pay frozen, for the businesses swamped by debt, and the families paying more in council tax.
“And the millions of people who are out of work or worried about losing their job, and although the Chancellor spoke for almost an hour we heard nothing about a long-term plan to fix social care.”
Sir Keir said the Chancellor is “betting on a recovery fuelled by a consumer spending blitz”.
In a nod to reports of spiralling costs for the refurbishment of the flat over No 11 Downing Street, Sir Keir joked: “In fairness, if my next door neighbour was spending tens of thousands of pounds redecorating their flat, I would probably do the same.
“But the central problem in our economy is a deep-rooted insecurity and inequality and this Budget isn’t the answer to that.”
The NHS and care homes would have been “front and centre” of a Labour budget, Sir Keir said.
“Behind the spin, the videos and the photo ops, we all know the Chancellor doesn’t believe in an active and enterprising government.
“We know he’s itching to get back to his free-market principles and to pull away support as quickly as he can.
“One day these restrictions will end, one day we’ll all be able to take our masks off and so will the Chancellor, and then you’ll see who he really is.”