On Wednesday 27 October, a red letter day for briefcase enthusiasts across the nation, Chancellor Rishi Sunak will take to the House of Commons chamber to deliver his autumn budget and spending review.
The details of Sunak’s plans have already been subject to widespread speculation. On the one hand, despite growing concerns about rising COVID-19 infection rates and scientists’ calls for the government to introduce its ‘plan B’ pandemic restrictions, the budget presents a unique opportunity for the chancellor to set out his stall and put forward the government’s vision for a future beyond COVID-19. At the same time, Sunak is clearly conscious of the impact pandemic- borrowing has had on the public purse, and must also keep a wary eye on creeping inflation and the effects this will have on households across the country. Indeed, he has already stated that the Treasury’s thinking on fiscal policy has been primarily shaped by inflation and interest rate forecasts.
Beyond this economic backdrop, the chancellor will be keen to appease Conservative backbenchers, who have voiced their concerns about the UK’s high tax burden, the government’s equally high public spending and the effects both will have on the party’s entrenched economic ‘brand’. It is certainly no coincidence that Sunak spent the Sunday media rounds, insisting that he is instinctively keen on low tax, though he did not go as far as to rule out further tax rises before the next election. In this respect, the chancellor finds himself in the unique position of trying to juggle with his hands tied.
Based on the breadcrumbs and early announcements circulated in the press over the weekend, there aren’t likely to be any big shocks when the budget is announced on Wednesday - and it would appear the chancellor is erring on the side of caution at this moment in time. The Labour opposition certainly seems to think so, having pre-emptively accused Sunak of ‘smoke and mirrors’, when it comes to his spending pledges. Yet, despite the chancellor’s tight-lipped approach, there are still a number of talking points ahead of Wednesday’s budget and spending review.
Taxation tensions
In many respects, Sunak has already faced his biggest fight over taxation in the form of the health and social care levy, which was introduced last month. The levy, which will see a temporary increase on national insurance contribution rates from April 2022 - followed by a permanent levy of 1.25% on employers and employees from April 2023 - was met with vocal hostility from a number of Conservative MPs and, purportedly, some members of the cabinet.
While the levy was approved in a House of Commons vote, it is clear that many Conservative backbenchers are loath to see any further increases in the UK’s tax burden, and have made these feelings known to the chancellor. Sunak acknowledged these concerns in his speech at the Conservative party conference, stating that while tax rises might seem ‘un-Conservative’, we must accept that ‘our recovery comes with a cost’. How this cost reaches the taxpayer, will become much clearer on Wednesday.
Based on media mutterings, it seems likely that capital gains tax will be first in line for an increase, whilst the possibility of council tax hikes have also been mooted. While pundits do not anticipate big changes to inheritance tax, the process might be reformed to reduce certain loopholes that allow people to pay less. A smaller, but not insignificant Tory fallout has also been caused by Sunak’s apparent refusal to cut business rates, during a television appearance on Sunday morning.
In the field of ‘stealth taxes’, tobacco duties will rise, as per common practice and in the face of rapidly rising costs, the chancellor is expected to cut the rate of VAT on household energy bills. Meanwhile, duties on certain spirits such as whisky and gin may also increase by 5%. In better news for beer and sparkling wine drinkers, the expected overhaul to alcohol duties will likely see the cost of both fall. Cheers to that!
Whilst not necessarily a tax, it has also been widely reported that the threshold at which graduates repay their student loan will be lowered. Those earning over £27,295 currently pay nine percent of everything they earn above that limit. However, in order to cut Treasury spending, the chancellor could well announce that the earnings limit will be reduced to £23,000. At least the beer’s cheaper.
It seems unlikely that any other major tax announcements will be made on Wednesday, perhaps to avoid intraparty disquiet as much as anything else.
Wealth for health
While taxation has been subject to more speculation than certainty, £30 billion worth of spending announcements have already been made by the Treasury in the past week. Perhaps the most eye-catching announcement involves the £5.9 billion given to the NHS in England. Most of the money will be used to clear the ever-growing treatment backlog, while roughly £2 billion will go towards improving IT and driving digitisation within the NHS. The chancellor has described the NHS investment as a ‘game-changer’.
Staying in the field of health, it has also been announced that the chancellor will be providing £5 billion of funding for health-related research and development. This news will likely be welcomed by the 33 signatories of a recent letter sent to the chancellor, urging him to stand by his commitment to increase the UK’s R&D spend to £22 billion by 2024-25, in the upcoming spending review. Whether the chancellor says anything more on this pledge, however, will be seen on Wednesday, with some believing that the government could postpone or amend the ambition, behind closed doors.
The Treasury has also established a £1.4 billion investment fund to support companies with ‘strategically important investment proposals’. The funding includes £354 million to support investment in life sciences manufacturing – a nod to the work done by the sector at the height of the pandemic.
Building back better
Anyone who hasn’t been living under a rock for the past two years will know that this Conservative government is big on ‘building back better’ and ‘levelling up’. Whilst we’ve grown used to these lines being thrown out in government press releases and evening news segments, there’s plenty to suggest that the forthcoming budget will turn these slogans into actions. Moreover, despite being preoccupied with current economic realities, it seems that the chancellor is keen for Wednesday’s announcements to be viewed as a catalyst for the government’s post-COVID-19 ambitions.
Sunak has been clear that he envisages the UK’s pandemic recovery to be driven by jobs, using this position to justify the end of the furlough scheme, remove the £20-a-week uplift to universal credit and drive forward with the government’s ‘plan for jobs’. The government as a whole is also keen to maintain their ‘red wall’ support and invest in communities across the country. On Wednesday, we are likely to see how Sunak intends to lay the requisite foundations, for both to become a reality.
The Treasury has already announced £7 billion to improve the transport systems of cities outside of London, which will be administered by metro mayors. Sunak addressed this investment by stating ‘great cities need great transport, and that is why we’re investing billions to improve connections in our city regions, as we level up opportunities across the country.
The chancellor is also expected to announce a 5% rise to the ‘national living wage’ from April next year- a clear nod to the government’s commitment to incentivising better-paid work across the country and a ‘skills revolution’, which will use £3 billion of investment to ‘spread opportunity across the UK by transforming post-16 education, giving people the skills they need to earn more and get on in life’. Sunak is also expected to expand free Level 3 courses for adults in STEM subjects and announce £150 million in funding for regional angel investors, outside of London and the South East.
At a time when the UK’s job vacancies are at a record high, sector-specific labour shortages are hitting the headlines, and certain businesses are experiencing scarring after the end of the furlough scheme, it will be interesting to observe the chancellor’s tone when he makes his jobs-focused announcements on Wednesday.
Any other business?
Aside from taxing, spending, saving and mending, other notable budget inclusions could include:
- A big statement on climate change, to build momentum ahead of COP26, which takes place in Glasgow next week;
- Funding for cladding removal and a levy on housing developers to pay for the removal of dangerous cladding;
- A new scheme to build 160,000 homes on brownfield land;
- A £435 million set of measures to prevent crime, particularly violent offences against women.