Sunak has played a tough hand well
It is safe to say that no peacetime Chancellor has ever delivered a Budget like this. Rishi Sunak, just over a year into the job, found himself announcing figures for debt and borrowing that seemed inconceivable 12 months ago. For a free-market Conservative, these are the last budgetary measures with which he would wish to be associated. Indeed, even last summer when the pandemic appeared to have receded and the Chancellor’s “eat out to help out” scheme was in full swing, he could not have imagined that he would still be supporting businesses and jobs to the tune of £400 billion the following spring. Even in 2022 the Treasury is expected to borrow £230 billion, the highest deficit since the Second World War apart from this year.
This is the cost of the economic lockdown imposed in order to fight the pandemic and, as Mr Sunak said, it must be paid down at some point. The Chancellor was refreshingly honest about his intentions to take more in tax for five years by freezing personal allowances and increasing corporation tax on the most profitable companies.
However, to avoid killing off a swifter recovery than expected later this year, these will not take effect yet and are due to hit in the run-up to the next election. That is a bold decision politically, though it is always within the Chancellor’s remit to declare his fiscal prudence a success in 2024 and offer voters relief as they go to the polls. He would not be the first Chancellor to do so.
But for all his plain speaking, one important decision was largely glossed over. Why is the furlough scheme and other massively expensive financial support being extended until October when the Government’s roadmap envisages a return to near-normal life by the end of June? The cost of continuing the help for a further three months must be colossal. Mr Sunak said “we are going long in order to accommodate the most cautious approach” to ending the lockdown. But delay is expensive and the Chancellor has reportedly been keener than his Cabinet colleagues to open up earlier.
A quicker end to the lockdown as cases fall, vaccines are rolled out and hospitals empty might obviate the need for some of the proposed tax increases. But the Government is evidently determined to resist any pressure for an early relaxation. To that end, grants, tax holidays and guaranteed loans will even continue into next year in the expectation that people will remain reluctant to visit pubs and restaurants and that limits placed on theatre and cinema audiences will make it hard for them to trade viably.
The freezing of income-tax thresholds across the board, including for the lowest paid, will certainly put paid to the promise made by Mr Johnson, when he was campaigning for the Conservative Party leadership, that he would raise the level for paying the higher rate to £80,000. That pledge seemed to presage a continuation of post-thatcherite Tory tax orthodoxy – that the surest way to growth was to reduce public spending and let people keep more of their own money. But that prospect has been scuppered by the pandemic and the upshot is the highest tax burden since the Sixties, which speaks volumes about the reckless economic policies of 50 years ago.
These rate freezes have been dubbed “stealth taxes”, but unlike some of his predecessors Mr Sunak made no attempt to hide them as he sought to be straight with voters about what must lie ahead.
There were welcome commitments to boost investment, with the eight new freeports leading the way alongside new incentives to unlock cash reserves with a “super-deduction” of tax bills. A feared blow to the housing market was removed with the extension of the stamp duty holiday and first-time buyers struggling to find a deposit will be helped by the return of 95 per cent mortgages. The much-flagged increase in corporation tax to 25 per cent will affect just 10 per cent of the most profitable companies, with smaller enterprises remaining on 19 per cent, lower than most EU countries.
The sectors hardest hit by the pandemic – the arts, sports and pubs – are all being given extra assistance, but businesses that do well will be expected to make a contribution once they are up and running again. This seems only fair on the general taxpayer, whose altruistic willingness to pay more in times of crisis is not always reflected in the way they vote. None the less, there was political artifice in this Budget in that it leaves Labour nowhere to go other than to become the party of tax cuts and fiscal prudence, which seems unlikely.
When Mr Sunak took over as Chancellor in February last year there had not been a single case of Covid reported in the UK. To say he was then dealt a difficult hand would be a gross understatement, but he has played it with a great deal of acumen, both financial and political.
The Chancellor’s purposeful honesty also extended to an acknowledgement that the bill for protecting the current generation of older people and stopping the NHS being overwhelmed will be paid by their children and grandchildren. As he observed, it will be the work of many governments over many decades to pay it back and restore the public finances to anything approaching an even keel. It is a sobering thought that the outstanding debt from the First World War was only finally repaid in 2015.