This was an easy budget for Rishi Sunak to deliver. He’s under limited pressure from his own party (for now) to set out how he will pay for the pandemic-related spending that kept the British economy afloat.
The red wall
Tory MPs in northern red wall seats will be pleased to see the spending continue. They need their party to avoid being tainted with a new round of Conservative austerity if they are to be re-elected in 2024 (or earlier if the Fixed Term Parliaments Act [2011] is repealed). They’ll also be pleased to see their Southampton-born Yorkshire-representing Chancellor further cement his commitment to the north with his freeports announcements – benefitting many northern towns, and the new Treasury department being based in Darlington.
Tax rises? Not now.
Most economists and the markets are in general agreement that now is not the time to be raising taxes. Low interest rates mean that government borrowing to encourage economic growth is the best way forward. But if he wants to keep those interest rates low and the spending taps flowing, Sunak needed to indicate how he will chart a path back to financial prudence. Hence today’s speech and Sunak being “open and honest” about the need for future tax rises.
Amongst the giveaways there was an extension of the furlough scheme until the end of September. An additional 600,000 self-employed workers will receive grants to cover losses. The business rates holiday will continue. The hospitality, leisure and tourism sectors will pay a lower rate of Value Added Tax (VAT) for another 12 months. There was a small rise in the minimum wage and the stamp duty holiday has been extended until the end of June.
But Sunak also indicated how the UK’s debt burden will begin to be dealt with. Corporation tax is to go up from 19% to 25% for bigger companies in 2023, a reversal of the economic strategy pursued by George Osborne as Chancellor. The personal allowance and the higher rate threshold will be frozen for four years from April 2022. This means more lower-income earners will begin paying tax and high earners will pay more of it.
Tough decisions
This all indicates a direction of travel. Sunak knows that the debt burden needs to be reduced. Whilst he’s betting on economic growth taking us a long way, he’s also prepared to take the tough decisions that will keep the bond markets, the OBR, Tory backbenchers and the media happy.
General Election
Whether these tax rises actually happen in 2023 with a general election looming remains to be seen. But what’s clear is that whilst Sunak is the anti-Osborne when it comes to Corporation Tax, he is very much playing his predecessor’s favourite tunes when it comes to framing the economic debate around the fiscally responsible Conservatives vs the profligate Labour Party, whilst also robbing the opposition of one of its main proposals to raise revenue. Whether that framing succeeds or not will depend on how well the economy recovers.
Key to achieving all of this will be timing. Sunak has to ensure that the economy is recovering before he can bring about tax rises. But, he also has to leave time for the traditional pre-election tax cut giveaway in 2024. All things considered, a tricky balance to strike.
Full details of the Budget are here on gov.uk.
by Max Wilson, Director