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Rishi Sunak has told British businesses and millions of middle-income people that they will pay the price of the government’s year-long fight against Covid-19 on a spend now, pay later budget that combines life support for the economy with largest tax increases since 1993..
Delivering his second budget, the chancellor said he would “go long”, extending many economic support measures, including the licensing plan, until the end of September at a cost to the Treasury of 65 billion pounds.
But Sunak insisted that two years in which the budget deficit would be the highest in peacetime history meant that he had no choice but to freeze personal tax breaks and increase corporate tax from 19% to 25% by one. jump in 2023.
Repeatedly underscoring the devastating financial impact of the pandemic, Sunak used the word “honest” six times as he underscored the need to “start fixing public finances.”
“Our economy has contracted 10%, the biggest drop in more than 300 years. Our indebtedness is the highest outside of wartime. This country, and the entire world, will take a long time to recover from this extraordinary economic situation ”, he warned.
The independent Office of Budget Responsibility said the economy will recover quickly from its latest pandemic-induced lockdown and posted 7.3% growth next year, the fastest rate of expansion since World War II.
It said production will regain ground lost during the pandemic in mid-2022, six months earlier than previously expected, and will lower its forecast for peak unemployment from 7.5% to 6.5%.
Still, the long-term damage from Covid-19 would leave the economy 3% smaller in five years than it would have been otherwise, leaving a hole in public finances for the chancellor to fill.
Sunak announced that the personal tax-free allowance and the highest rate threshold will be frozen from April 2022, rather than increasing in line with inflation, bringing 1.3 million people into the tax system and creating one million. of taxpayers with higher rates by the middle of the decade. .
Additionally, Sunak became the first chancellor since Denis Healey in the 1970s to raise the corporate tax rate, reversing most of the cuts made by George Osborne after 2010 with a stroke of the pen.
Sunak said that in the next two years business investment will be boosted by a new “super deduction”, which will allow companies to offset 130% of the cost of capital investment with taxes. The £ 25bn tax break would boost investment by 10%, or £ 20bn a year, he added.
“These are important decisions that have been made. Decisions that no chancellor wants to make. I acknowledge that they may not be popular. But they are honest, ”Sunak said.
With the OBR noting that tax revenue as part of economic output was on track to reach 35%, the highest since Roy Jenkins was Labor Chancellor in the late 1960s, Paul Johnson, director of the think tank of the Institute for Fiscal Studies said the budget represented a new phase in UK economic history.
“Sunak made a lot of it out of his desire to be honest and measure up to the British people,” Johnson said. “The fact that you felt compelled to raise taxes by hitting businesses and freezing appropriations, rather than through more explicit increases in people’s taxes, suggests that there are limits to what you want to match with us as you try increase the overall tax burden to its highest sustained level in history. “
Tony Danker, CEO of CBI, said: “The super deduction should be a real catalyst for companies to green light their investment decisions. The Chancellor’s audacity in this measure is worthy of admiration.
“But moving Corporation Tax to 25% in one jump will bring a big respite for many companies and send a worrying signal to those planning to invest in the UK.”
Although the government’s roadmap predicts that restrictions on the economy will be lifted by June, Sunak said he would be cautious in extending Treasury support beyond the summer. Companies in the hospitality, retail and leisure sectors, the most affected by the restrictions, will have a reduced VAT rate for one more year, while the stamp holiday will last until the end of September.
Labor leader Keir Starmer said his party would support the corporate tax increase; but he accused Sunak of “plugging the gaps” by failing to solve many of the problems exposed by the pandemic.
Highlighting Sunak’s failure to establish new support for social care or the NHS, Starmer told Commons, “This is a budget that did not even attempt to rebuild the foundations of our economy. Or to ensure the long-term prosperity of the country. Instead, he did the job the chancellor always intended: a quick fix. Wallpapering the cracks.
“The opposing party spent a decade weakening the foundations of our economy,” he added. “Now they pretend they can rebuild it. But the truth is that they won’t face what went wrong in the past and they don’t have any plans for the future. “
LibDem leader Ed Davey echoed Starmer’s criticism of the lack of a plan to address the crisis in social care, which Johnson promised to solve on his first day at Downing Street in 2019.
“Of all the holes in the budget, possibly the most damaging is the lack of new money and new ideas for the care industry,” Davey said. “Even before the pandemic, the welfare sector was on its knees, and conservatives seem to have no interest in fixing the obvious problems.
In total, the Treasury now estimates that the government will have spent £ 407 billion during the pandemic period, but the independent Office of Budget Responsibility noted that there was no allocation for pandemic-related expenses after next year despite the fact that the roadmap recognizes that annual vaccination programs and ongoing testing and tracking are likely to be required. “The government will also have to decide how to catch up with services disrupted by the virus, in particular delays in non-urgent procedures on the NHS that have accumulated and months of missed or impaired schooling for some students,” the official added. OBR. .
“In the face of these post-pandemic pressures, the government has so far cut more than £ 15 billion a year from spending on departmental resources from 2022-23 onwards, setting up a challenging spending review later this year.”
When asked about the issue at a Downing Street press conference, Sunak said he didn’t have “a crystal ball,” adding: “Obviously, at this point, we don’t exactly know the future path of what’s going to happen. But what we do know is that this year there is a huge demand for additional funds for the coronavirus ”.
