BUDGET 2021
Extra £65bn Covid help to protect jobs Taxes rise to highest level in 50 years ‘Storm clouds of austerity on the horizon’
RISHI Sunak has unveiled a “whatever it takes” Budget with £65 billion of additional Covid help to protect jobs but he also raised taxes to their highest level in more than 50 years to pay for it.
In his set-piece Commons statement, the Chancellor explained how the pandemic had “fundamentally altered” the UK’S way of life, telling MPS:
“Much has changed but one thing has stayed the same – I said I would do whatever it takes, I have done and I will do.”
Pledging to use the “full measure of our fiscal firepower” to protect jobs and livelihoods as Britain emerged from the lockdown, Mr Sunak announced a raft of extensions beyond the expected end of the lockdown.
Furlough has been extended for five months, while the £20-a-week rise in Universal Credit will continue for a further six months.
The reduced VAT rate for the hospitality sector and a continuation of the business rates and stamp duty holidays in England have also been extended until June.
To Tory hear-hears, he also froze all alcohol duties for the second year in a row and scrapped a planned increase in fuel duty.
However, Sir Keir Starmer dismissed the Budget as a “quick fix”, an attempt to “simply paper over the cracks” rather than rebuild the foundations of the economy.
“The Chancellor may think 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, the families paying more in council tax and the millions of people who are out of work or worried about losing their job.”
Declaring Mr Sunak did not believe in an active and enterprising government, the Labour leader added: “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.”
At a post-statement press conference in Downing Street, the Chancellor insisted he wanted to be honest with the public about the scale of the challenge ahead.
“I know the British people don’t like tax rises, nor do I. But I also know they dislike dishonesty even more. That’s why I’ve been honest with you about the problem we have and our plan to fix it.
“So right now, we’re going long, extending our support for people and businesses well beyond the end of lockdown. And while it is important to control borrowing and debt, those measures only take effect after the economy has recovered.”
He insisted his Budget measures meant “our recovery begins today”.
The Chancellor also placed his set-piece Commons statement in a constitutional context, insisting: “Our future economy depends on remaining a United Kingdom” and highlighted that an extra £1.2bn has been given to Scotland because of the new measures.
“Millions of families and businesses in Scotland, Wales and Northern Ireland have contributed to and benefited from our coronavirus response and central to that has been a Treasury that acts for the whole of the United Kingdom.
“That is not a political point, it’s an undeniable truth,” he declared.
Mr Sunak referred to three Scottish City and Growth Deals in Ayrshire, Argyll and Bute and Falkirk being accelerated and a £27 million investment in the Aberdeen Energy Transition Zone to support north-east Scotland playing a leading role in meeting the UK’S net zero target as well as a further £5m for the Global Underwater Hub, also in Aberdeen, to ensure the UK’S underwater sector grows alongside the global subsea market.
He described coronavirus as having caused “one of the largest, most comprehensive and sustained economic shocks this country has ever faced”, but said the UK’S fiscal response was equally comprehensive and sustained, totalling over this financial year and next £407bn.
He pointed out how the forecast from the Office for Budget Responsibility (OBR), the independent forecaster, showed this year the Government borrowed a record amount: £355bn.
This represented 17 per cent of the UK’S national income, the highest level
Much has changed but one thing has stayed the same – I said I would do whatever it takes, I have done and I will do
of borrowing since the Second World War. Next year, borrowing is forecast to be £234bn, 10.3% of GDP.
The Chancellor claimed the measures announced would mean borrowing by 2025/26 would fall to 2.8% of GDP and underlying debt would peak at 97.1% of GDP by 2223/24, falling back to 96.8% by 2025/26.
“The amount we’ve borrowed is comparable only with the amount we borrowed during the two world wars. It is going to be the work of many governments, over many decades, to pay it back.”
While the Chancellor made clear he would stick by the Conservative manifesto pledge not to raise the big three revenue-raisers of income tax, National Insurance and VAT, he confirmed he would freeze the
Uk-wide tax-free personal allowance and the higher rate tax threshold in England, Wales and Northern Ireland from next year until 2026 – which effectively means people will be paying more tax.
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 1.3 million more people will be dragged into paying tax as wages increase.
The 40p higher rate threshold for those south of the Border will increase by £270 to £50,270 in April but will then be frozen for five years, calculated to bring in more than an extra million people to the higher bracket. The higher rate in Scotland at 41% is set by the Scottish Government.
Mr Sunak stressed no-one’s takehome pay would be less than it was now as a result of the new policy, but told MPS: “I want to be clear with all members this policy does remove the incremental benefit created had thresholds continued to increase with inflation. We are not hiding it, I am here, explaining it to the House and it is in the Budget document in black and white.”
However, he insisted: “It is a tax policy that is progressive and fair.”
As expected, corporation tax will increase from 19% to 25%, starting in 2023. According to the Budget Red Book, this will see an extra £11.9bn raised in 2023/24, £16.25bn in 2024/25, and £17.2bn in 2025/26.
The Chancellor insisted that despite the rise, the UK would still have the lowest rate in the G7.
However, 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. Mr Sunak described this as the biggest tax cut in history and showed the Government was on the side of business.
The OBR noted how the Budget measures meant Britain’s tax burden would increase to its highest level for more than 50 years – from 34% to 35% of GDP in 2025/26.
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
The forecaster calculated that 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 raise a total of £31.8bn in 2025/26.
The OBR said it expected the economy to return to its pre-covid level by the middle of next year, six months earlier than it had 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.
At the Number 10 press conference Mr Sunak defended increasing the tax burden, saying: “I don’t think any other chancellors have had to do as much fiscal support for the country as I’ve had to.”
Repeating his pledge to be “honest” with the public about the problems the country faced because of the pandemic, he insisted: “It is going to take us a long time to fully recover from the damage coronavirus has done to our economy.”
Paul Johnson, director of the financial think tank the Institute for Fiscal Studies said: “What we can be sure of is that Rishi Sunak has spent big again, extending some support right through 2021 at a cost of an additional £60bn or more. As a result, borrowing is now forecast to again be above 10% of national income in the coming financial year. Whether the big fiscal tightening planned for subsequent years will actually happen is less certain.
“It continues to depend on spending being lower than planned prior to the pandemic and it also depends on a large increase in corporation tax actually being implemented without additional measures to at least ease its long-run impact.”
He went on: “Make no mistake, this proposed increase in the main rate of corporation tax is a big reversal of decades of policy direction and a significant risk. For all the rhetoric about it leaving the headline rate here below that in other G7 countries, our effective tax rate will be relatively high.”
Mr Johnson added: “Mr Sunak made much of his desire to be honest and to level with the British people. The fact that he felt constrained to raise taxes by hitting companies and through freezing allowances, rather than through more explicit rises in people’s taxes, suggests there are limits to how far he wants to level with us as he attempts to raise the overall tax burden to its highest sustained level in history.”
The Chancellor ended his speech to MPS on a poetic note. Acknowledging the last year had been a test unlike any other, he quoted Tennyson, saying: “‘That which we are, we are,’” adding: “The fundamentals of our character as a people have not changed; still determined, still generous, still fair.
“That’s what got us through the last year; it’s what will guide us through the next decade and beyond.”
I don’t think any other chancellors have had to do as much fiscal support for the country as I’ve had to