A review of Budget 2021

“No spoonful of sugar… but essential medicine for a post-Covid recovery.”

After a year of unprecedented levels of public spending, this budget was always going to be a matter of a government juggling the desire to drive demand and fuel economic recovery with outlining a longer-term plan to cut deficit and turn the page after the Covid crisis.

Having borrowed £400bn over the past year, the Chancellor had a duty to show the public a serious plan to start balancing the books. In that respect, he seems to have done a fairly good job.

Sunak made no secret that taxes would have to go up to pay for the mountains of debt accumulated over the past 12 months. The increase on corporation tax, from 19% to 25%, is undoubtedly the most striking of these hikes as it directly challenges the party’s ethos as a champion of business.

The rise does not, however, come as an absolute surprise: Boris Johnson stated prior to the 2019 general election that he wouldn’t reduce the tax rate from 19% to 18% in order to increase spending on the NHS, implying that he wouldn’t be against the idea of increasing the tax rate if circumstances allowed for it.

Moreover, the Chancellor is right to stress the fact that the UK will still have the lowest tax rate among G7 countries despite the increase: the point is that the UK will probably not lose its competitive advantage as a global business hub, at least not in the short-term. The real risk is that the increase in corporation tax, which is due to kick-in during Q2 2023, might coincide with the moment the economy finally reaches pre-Covid levels and stymie economic growth then.

However, the fact that the majority of businesses (those with profits below £50,000) will still be liable for the current 19% demonstrates that the government’s approach is much lighter and prudent than critics may say.

Other tax announcements include a cunning freeze on the levels of personal income tax thresholds. Despite raising the thresholds for the basic and higher rates of tax, from £12,500 to £12,570 and from £50,000 to £50,270 respectively, the new policy will effectively push more people towards the higher tax bracket as the tax threshold will not follow inflation, thus increasing the tax burden on the general population.

  It is clear that the government is reluctant to break its manifesto pledge by increasing the rate of income tax, but one might wonder if the creation of a new “super-high” threshold (for example of 50% on incomes over £1m) would have been opportune and more easily justifiable this time around given the exceptional circumstances.

Despite some notable tax increases, this budget is broadly consistent with the expansive fiscal approach which has driven government policy over the past 12 months. Indeed, many sectors of the economy will continue to receive support in the form of tax cuts and government grants. This is particularly true of the hospitality sector, with the business rates holiday extended to the end of June, the rate of VAT reduced to 5% and the creation of £5bn of new grants.

  These policies are welcomed. However, the cancellation in the planned increases in duties on alcohol may turn out to be a missed opportunity for the government: indeed, with so many people desperate to go out to the pubs, an increase could have gone largely unnoticed and may not have hurt businesses so much, bringing in a little extra cash in the process.

Maybe the biggest disappointment of this budget is the extension of the furlough scheme, which is set to continue until the end of September. The government showed some real courage and initiative in creating it at the height of the pandemic but extending it further may be counter-productive in the long-run. Indeed, the scheme may end up subsidising unviable jobs in zombie businesses, which will eventually bring productivity down.

  If the political cost of unemployment is huge, the government must realise that voters, particularly in Red Wall constituencies, will ultimately make a judgement based on the rate of unemployment in three years-time, not now. It could be argued that the government should do more to accelerate, not impede, the regeneration of the economy and encourage people to switch jobs rather than stick to their current ones.

Furthermore, it is obvious that there have been multiple abuses to the scheme, with the creation of the £100m anti-fraudster taskforce attesting to that. Finally, the end date of September, which is three months after the planned re-opening of the country, is confusing, illogical and may hinder consumer and investor confidence.

If exiting the Covid crisis was always going to be the prime focus of this budget, it is interesting to notice updates in the areas of Net Zero and levelling up, which the government seems so keen to flag as the future engines of the UK economy.

The “super-deduction” tax policy on investment and the creation of eight freeports may have the potential to stimulate economic recovery, particularly outside of London and across the manufacturing, construction, and utilities sectors. With companies having to invest before the end of March 2023 in order to benefit from the scheme, this policy may be just what is required to kick-start investment post pandemic and spur economic growth. Either way, it will certainly alleviate some of the burden from the increase in the corporation tax rate.

Finally, the creation of the UK’s first infrastructure bank in Leeds, which will support at least £40bn of investment in sectors such as renewable energy, carbon capture, storage and transportation, is an ideal way of meeting the combined objectives of Net Zero and levelling up.

All in all, this budget is an honest and balanced attempt by the government at sustaining demand while outlining a longer-term plan for fiscal restructuring. What is clear is that the government is deeply committed to ensuring that it does everything in its power to restart the economy in the near future. This is not a problem per se, but it will have to make sure it gives back control of the economy sooner rather than later.

If not, the risk is that the public becomes too comfortable with, and dependent on, this type of government intervention, triggering a slow return of the Big State and a new normal economic policy based around a combination of high taxes and high spending, all with the approval of the Conservative party.

  A less cynical view would be to say that the party has successfully incorporated its new voting-base inherited from the last general election and uses this as a permission to change its economic policy towards a more interventionist approach sustained by an increase in taxation. Whether this new approach works or is popular is another story.

The government may seem confident in the future of the economy. Ultimately however, it won’t be the level of investment or fiscal policy which will drag Britain out of its economic misery, but consumer confidence.

The question now is: will we see an explosion in spending post pandemic, with people flocking to pubs and restaurants the moment the country opens up? Or has Covid brought a permanent blow to British consumer confidence and will pandemic paranoia risk jeopardising the recovery?

This is the key factor which will drive the economy over the next year and one, unfortunately for the Chancellor, over which the government has little control.

If you liked this article and want to help our organisation expand, please consider donating.