Analysis

Political Insider: Budget and 2021 Spending Review

Listening to Rishi Sunak deliver the Budget and 2021 Spending Review, you would be forgiven for forgetting that the last 18 months have seen some of the most turbulent economic times with the UK’s public finances being left in a pretty precarious state.

In heralding the arrival of “an economy fit for a new age of optimism” the Chancellor seems to have taken close note of the Prime Minister’s boosterish attitude and concluded he wants a piece of the action.

That’s not to say some of his optimism is unfounded. The unexpected speed at which the economy has bounced back from the impact of the Covid-19 pandemic, with the OBR upgrading predicted growth for this year from 4% to 6.5%, provides the Chancellor with some of the flexibility he has used to announce significant spending commitments.

With this additional money burning a hole in his pocket, combined with greater receipts from the rise in Corporation Tax announced earlier this year, there is certainly something reminiscent of the Blair/Brown approach towards tax and spend.

The new spending includes £5.9bn to NHS England to clear the waitlist backlog, £6.9bn for a “local transport revolution”, a £3.8bn prison-building scheme, £5bn to remove cladding from high-risk buildings, £3bn for post-16 education, a £1.8bn regeneration investment to support housebuilding amongst a raft of other spending pledges.

With the economy expected to return to pre-Covid levels by the end of this year, total departmental spending will now increase by £150bn over the remainder of this Parliament, amounting to a significant 3.8% annual increase – certainly no return to austerity.

On the tax side, seeking to demonstrate some Thatcherite credentials and hoping to exploit the “Brexit dividend”, Sunak announced a total of £7bn of tax cuts for businesses, including a new 50% business rates discount for those in hospitality, retail and leisure up to a maximum of £110,000 in 2022, as well as a freeze on fuel duty and reforms to Tonnage Tax, Air Passenger Duty and alcohol duties.

There was a sting in the tail, however, with a three-year delay to the £22bn annual R&D spend target to 2026 and the Chancellor acknowledging that the tax burden is rising to its highest level as a percentage of GDP since the 1950s.

Overall, in doubling down on the Prime Minister’s commitment to make the UK an economy of higher wages, higher skills, and higher productivity the Chancellor has placed his flag firmly in the ground alongside Boris Johnson.

This will worry some of his Conservative colleagues, some who feel the drive towards higher wages will result in a self-perpetuating circle of rising inflation and rises in the cost of living, and others who remain concerned that the Conservatives will no longer be seen as the party of the small state and low taxes.

To that end, the Chancellor also announced new fiscal rules in the form of a new “Charter for Budget Responsibility” which will state that underlying net debt must be falling as a percentage of GDP and, in normal times, borrowing can only be for infrastructure investment, with day-to-day spending being funded only through taxation. Whether this will be enough to placate some of the Chancellor’s colleagues remains to be seen.

The elephant in the room is, of course, the next General Election.

Although not due until 2024 – in theory there are only two more Budgets before that – there is significant pressure to be making progress now, to getting shovels in the ground, so that come next polling day, those first-time voters who delivered the 2019 landslide can see the tangible benefits their vote led to.

The Chancellor and his team will probably be reflecting on a job done, whether it was done well or not remains to be seen and only after the finer detail of the Budget is pored over in the hours and days ahead.

Catch up on our budget analysis breakfast below:

Ryan Shorthouse
Marco Schwartz
Charlotte Ivers

The Labour View

Leader of the Opposition is a thankless job at the best of times. It is at its particular worst on Budget Day when due to the theatre of the event, the Leader of the Opposition is forced to respond to the Budget immediately after hearing it for the first time.

Today was made even more difficult for the Labour Party, and not just because Rachel Reeves, the Shadow Chancellor, had to stand in for self-isolating Keir Starmer at the last minute. No, it was made harder because a lot of Sunak’s Budget was in effect a repudiation of Conservative policy over the past decade – and indeed, it’s not hard to imagine vast swathes of it being delivered by a Labour Chancellor.

As it happens, Reeves made a convincing impromptu debut with a quick-witted opening reference to the Budget as one for ‘the bankers, sipping champagne on their short haul flights’, reflective of her skill as a seasoned Commons orator. Her response also provided a clear indication of where Labour is going to set its economic stall ahead of the next election. The party now recognises that it can’t out-spend a Conservative Party who has suddenly found common kinship with the Magic Money Tree, but it can promise better value spending and better-run public services.

The question which remains is whether this more technocratic argument will be enough to combat Boris Johnson – and now Rishi Sunak’s – boosterism.

The Detail

Current state of economy/OBR forecasts

  • Inflation is likely to rise, estimates suggest by an average of 4% over the next year. Explained by two global forces: (1) global economies reopening has made demand greater than supply; (2) global demand for energy has surged. It will be “months” before these problems can be “eased”
  • National actions to tackle the above: Transport Secretary announcing today new facilities for lorry drivers. Freezing vehicle exercise duty. Extension of HGV levy until 2023
  • OBR expect UK economy recovery to be “quicker” – UK will return to pre-Covid size at the beginning of 2022
  • Economy will grow by 6% in 2022
  • OBR expect unemployment to peak at 5%, original estimate 12%
  • Employment has grown by 3%
  • OBR forecast for business investment has been revised up for the next five years
  • OBR has revised down scarring assumption from 3% to 2%

Strengthening the public finances

  • Establishment of Charter for Budget Responsibility with two new fiscal rules “which will keep this Government on the path of discipline and responsibility”
  • The first rule is that underlying public sector net debt, excluding the impact of the Bank of England, must, as a percentage of GDP, must be falling.
  • The second is that “in normal times” the state should only borrow to invest in our future growth and prosperity.
  • 3% of GDP is on capital investment
  • The four fiscal tests set out by the Chancellor in the last Budget have been met, Sunak says
  • 0.7% of GDP spending on foreign aid will return in 2024/25 due to meeting fiscal tests
  • £150 billion increase in departmental spending budgets due to meeting fiscal tests

Supporting children

  • £300 million towards ‘A Start for Life’, supporting new parents, and £150 million for Early Years training and holiday programmes, on top of the previously announced funding for Family Hubs Funding to create a network of family hubs around the country
  • £200 million in supporting families programme
  • £200 million a year holiday and food programme

Schools

  • £4.7 billion by 2024/25, to restore per pupil funding to 2010 levels
  • Tripling of new school places for children with special needs
  • £2 billion of new funding to schools and college
  • Total education recovery fund at £5 billion

Communities

  • £560 million for youth services
  • £200 million to build or transform 1000 football pitches
  • Allocating first-round of bids from the levelling-up fund.
  • 20,000 new police officers, an extra £2.2 billion for courts and rehab facilities and £3.8 billion for prison-building

Culture and heritage

  • £800 million to protect museums, libraries, local culture
  • 100 regional museums to receive renovation funding
  • Review of museum freedoms to protect freedoms and culture
  • “More generous creative tax reliefs”
  • Tax reliefs for culture will be doubled until 2023

Infrastructure

  • “This government chooses to invest”.
  • £21 billion on roads, £46 billion on railways
  • £5.7 billion for London-style transport settlements in Manchester, Liverpool, West and South Yorkshire, the West of England
  • £2.6 billion for long-term pipeline of 50 local road upgrades
  • Bus funding of £5 billion pounds
  • Spending on cycling infrastructure of more than £5 billion, the same funds will also be spent on local minor roads

Innovation

  • R&D investment will be £22 billion by 26/27. £20 billion investment by end of this Parliament, which is in addition to R&D tax reliefs already announced
  • £107 million investment by National Investment Bank for offshore wind site in Teesside

Business

  • Announcement of consulting on further changes to regulatory charge cap for pension schemes
  • £1.4 billion Global Britain Investment Fund
  • British Business Bank regional financing programme increase in funding of £1.6 billion
  • Scale-up visa criteria confirmed
  • Expansion of R&D tax reliefs to cloud computing and data costs (modernised R&D tax regime)

Education system “for all”

  • Skills spending increase by £3.8 billion, an increase of 42%
  • New UK wide numeracy programme for adults – ‘Multiply’ – £560m investment.

Taxation

  • Shipping: Reform of tonnage tax regime. Regime will reward hoisting of the UK Merchant Shipping flag – the Red Ensign.
  • Air Passenger Duty: Domestic flights from April 2023 will be subject to a new, lower rate of air passenger duty. 9 million passengers will be see a 50% reduction in tax.
  • Extending support for English airports for a further 6 months.
  • £1 million annual investment allowance will not end in December, will be extended to March 2023
  • Bank surcharge in corporation tax: UK government will retain surcharge of 3%
  • Annual allowance will be £100 million to help challenger banks
  • Chancellor asks: “Do we want to live in a country where the response to every question is what is the Government going to do about it?”. He adds that the Government “should have limits”, and as a result, his goal is to reduce taxes by the end of this Parliament

Rates

  • More frequent evaluations – every three years – for business rates
  • Introducing new investment relief to encourage businesses to adopt green technology
  • Introducing a new Business Rates Improvement Relief. From 2023, every business will be able to make property improvements with no additional business rates for a period of 12 months.
  • Investment incentives total £750 million
  • 2022’s planned increase in the Multiplier will be cancelled
  • 50% business rates discount in the retail, hospitality and leisure sectors. Business tax cut worth over £100 billion
  • Today’s Budget cuts rates by £7 billion

Alcohol duties

  • “Most radical simplification of alcohol duties in 100 years” in five steps:
  • Step One: Slashing number of main duty rates from 15 to 6
  • Step Two: New small producer tax relief
  • Step Three: End duty premium on sparkling wines and fruit cider
  • Step Four: Draft relief announced of 5% – new lower rate of duty on draft beer and cider
  • Planned increase on duty on spirits, wine, whisky will all from 28 October cancelled. A tax cut of £3 million

Cost-of-living

  • Planned rise in fuel duty will be cancelled – a saving of £8 billion
  • National Living Wage increase to £9.50/hr, a full-time pay increase of £1,000 per year

Benefits

  • Sunak confirms that he will cut the universal credit taper rate from 63% to 55%. The Chancellor says it will be introduced by no later than 1 December

The Union

  • Scottish Government funding up by £4.6 billion, Welsh Government funding by £2.5 billion, and £1.6 billion for the Northern Ireland Executive, via the Barnett formula

Housing

  • £24 billion is earmarked for housing: £11.5 billion to build up to 180,000 affordable homes, with brownfield sites targeted for development; £5 billion for the removal of unsafe cladding for the highest risk buildings