Ahead of the Budget, the Chancellor told the Cabinet this morning that when it comes to the state of the public finances, we must be honest with people. As he delivered his three-part Budget, the themes of honesty and levelling with people were clear and set the scene for some challenging and unpopular decisions to come.
The first part of the Budget was about the continuation of Covid mitigation measures and protecting jobs and livelihoods through the remaining stages of this crisis. This was the part the Government did not expect to be talking about a year after setting out its initial response to the pandemic. Sunak will continue to justify this high-level of borrowing and spending in the knowledge that the cost of inaction would have been higher, and the country would have seen even higher levels of unemployment that have so far been avoided. Keeping unemployment as low as possible is the number one priority for the Government. The sense is that they do not have much choice here and they have learned that it is better to get ahead of the argument rather than be forced to as schemes get closer to their end dates. The thinking is spend more now and to factor in unexpected hitches or things going wrong. Questions will remain though about what might happen after this further extension of measures. While the vaccine rollout is a game-changer, the risk remains that the Government cannot know the path of coronavirus, so how sure can they be about whether the September furlough end date is really the right one.
The Chancellor spoke at length about the need for corrective action to avoid underlying debt rising indefinitely. He said this would involve long-term effort to pay it back, over many future Governments. This goes to the heart of the debate of how exactly will the Chancellor fix the public finances. Though buoyed by improved forecasts from the Office for Budget Responsibility, not least in part due to the success of the vaccine rollout, the Chancellor is keen to show that he cares about balancing the books. This matters to influential Conservative backbench MPs who want to see a return to financial discipline and competent stewardship of the economy. However, most of these MPs are also unkeen to see tax rises, wanting the Government to return to more traditional Conservative ideas of small state and low tax. Add to this the new intake of Red Wall Conservative MPs who have been voted in on the promise of levelling up and who like the idea of Big State Conservatism and you can see the Chancellor’s dilemma.
By focusing initially on freezing the personal allowance rate and increasing rate of Corporation Tax over this Parliament, the Chancellor is treading a careful path by ensuring at an individual level, people don’t take home less money, but he’s been clear he is willing to target profit with caveats. This also shows that this Government is not afraid to break tradition with previous Conservative administrations, both were flagship economic policies in the era of David Cameron and George Osborne. A big question remains over whether these tax rises and concerns over Britain’s attractiveness as a place to invest come under fire from a Tory rebellion that could grow over time, particularly as we get closer to a General Election.
In terms of the wider fiscal picture, the Chancellor has opted for more borrowing and tax give-aways in the short term in order to expedite the recovery. Part of this will be clawed back from 2023, when the super deduction costing £12bn a year comes to an end, and corporation tax is increased to 25%. Although Sunak stopped short of breaking his party’s commitment not to raise income tax rates, by disentangling the threshold increases from inflation, the move will amount to a tax rise in real terms, and will raise around £19.3bn between its implementation and 2025/2026. Given the reports last week unveiling that an interest rise of 1% would increase debt servicing costs by £25bn a year, this Budget will be seen as an important step to restoring stability to the public finances. As a result, the OBR estimates that the deficit will now fall back from the current level £355 billion (16.9 per cent of GDP) in 2020-21, to £107 billion (4.5 per cent of GDP) in 2022/23, and 2.8% of GDP in 2025-26.
The Chancellor concluded by setting out a longer-term vision and laying the foundations for a post-Covid economy. The Government sees the vaccine rollout as a real success, going better than they had expected and is keen to replicate this drive and way of working and delivering results in other areas. A focus on investment in the green economy, science and research are things we have heard a lot about recently, and the Chancellor seemed keen to put decisions and actions to words, prioritising his personal passion of freeports and trying to show this as a benefit of Brexit. The theme behind all of this was changing the economic geography of the country and we saw a tangible example of this with the announcement of the Treasury opening its first office out of London in Darlington, showcasing the importance the Government places on the Red Wall seats.
ANNOUNCEMENTS IN THE 2021 BUDGET:
Furlough will be extended until the end of September.
There will be no change to the terms initially. Employees will continue to receive 80% of their salary until September. In July, employers will be asked for a contribution of 10% and 20% in August and September, with Government support reducing to 70% and 60% respectively.
Support for the self-employed will continue until September, with two further grants provided.
The fourth grant will cover February to the end of April and be worth 80% of average trading profits over three months up to £7,500. The fifth grant will cover May until the end of September onwards but the amount available will depend on the loss of income.
The £20 Universal Credit uplift will be extended for a further six months.
The uplift will support those worst affected by the pandemic.
Working tax credit claimants will receive a one off £500 payment.
This is to complement the Universal Credit uplift extension.
New Action on Domestic Violence Programme
£19m will be provided for new domestic violence programmes, described as “one of the hidden tragedies of lockdown”.
Reopening the Economy
New incentives for businesses to hire new apprentices.
Businesses will be given incentive payments of £3,000 for all new apprentice hires of any age.
Contactless payment limit will increase to £100.
To support businesses upon reopening, the contactless payment limit will be increased.
New restart grant to help businesses reopen.
Non-essential retail will receive grants of up to £6,000 per premises as they are reopening first. Leisure and hospitality, which open later, will receive grants of up to £18,000.
Recovery loan scheme for businesses of any size announced.
The loan scheme will provide loans worth between £25,001 and £10 million, and asset and invoice finance worth between £1,000 and £10 million to businesses of any size through to the end of this year. The Government will guarantee 80% to lenders.
Business rates holiday extended until the end of June.
The 100% business rates holiday has been extended until the end of June for retail, hospitality, and leisure businesses. For the rest of the year, business rates will be discounted by two thirds.
Stamp duty holiday on properties worth up to £500,000 extended until the end of June
The stamp duty holiday has been extended to support the housing market and protect at risk jobs.
5% VAT cut for hospitality and tourism extended for six months.
After the initial 6 months, there will be an interim period where VAT is increased to 12.5%, before returning to the original 20% in April of 2022.
£700 million worth of funding for the cultural sector
£700 million for funding will be provided to cultural organisations as they reopen. As part of this, the Government will also back the joint UK and Ireland bid to host the 2030 World Cup.
New “help to grow” schemes.
This includes projects to provide businesses with management training. Business schools will provide training and mentoring, and the Government will cover 90% of the cost. Small businesses will also be helped to develop digital skills including free expert training and a 50% discount on productivity boosting software.
Personal tax thresholds frozen
The threshold will be increased next year to £12,570, with the higher rate threshold increased to £50,270 but both will remain frozen after this until 2026.
Freeze on taxation thresholds.
The inheritance tax thresholds, the pensions lifetime allowance, the annual exempt amount in capital gains tax and, for two years from April 2022, the VAT registration threshold, will be maintained at their current levels.
£100 million to tackle fraud in COVID-19 support schemes
A Taxpayer Protection Taskforce will be established to identify those who have exploited and defrauded COVID-19 support schemes.
Corporation tax will be increased to 25% by 2023.
This new higher rate will not take effect until April 2023, well after the point when the OBR expects the economy to have recovered. However, small businesses with profits of £50,000 or less, will be taxed at a Small Profits Rate, maintained at the current rate of 19%. The Treasury will introduce a taper above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate. The UK will still have the lowest corporation tax in the G7.
Extending tax loss carry backs for businesses.
Businesses will be allowed to carry back losses of up to £2 million for three years. If businesses are making a loss now, they can claw back tax paid on previous profits to get a cash refund from HMRC of up to £760,000.
Review of the bank tax surcharge
The surcharge will be reviewed to balance the rise in corporation tax while ensuring banks remain competitive.
Super Deduction for business tax bills
In 2021-22 and 2022-23, companies will be able to offset 130 per cent of investment spending on eligible plant and machinery against profits. The measure is over ten times more generous than the equivalent temporary capital allowance announced in the 2009 Budget.
Alcohol duties will be frozen.
This is the second-year alcohol duties have been frozen. It is estimated this will save drinkers £1.7 billion.
Fuel tax will remain frozen.
This is the eleventh consecutive year fuel tax has remained frozen.
Launching consultations on research and development tax relief and enterprise management incentives
These consultations aim to make sure the UK remains a competitive location for cutting edge research.
Establishment of the “Future Fund: Breakthrough”
The £375 million UK-wide fund will invest in innovative companies such as those working in life sciences, quantum computing, or clean tech, that are aiming to raise at least £20 million of funding.
Visa reform to attract highly skilled migrants in science, research, and tech.
To promote the UK as a scientific superpower, the visa application process will be simplified for those who are highly skilled.
UK infrastructure bank to finance the green industrial revolution.
This will be based in Leeds and have an initial capitalisation of £12 billion. It will support and invest in green projects.
New offshore wind projects
New port infrastructure will be built in Teesside and Humberside to support offshore wind development.
The world’s first green sovereign bond
This will allow retail investors to invest in green projects to promote the green industrial revolution.
Updated monetary policy remit for the Bank of England.
The Bank of England’s remit will be updated to reflect the importance of environmental sustainability.
Economic campus for the Treasury established in Darlington.
To promote levelling up and address regional inequalities, the Treasury will establish a base in the North of England.
£1 billion extra funding for the Towns Fund to support 45 further towns
Over £1 billion will be made available to support a further 45 towns in England through the Towns Fund. It is designed to help them with economic and social regeneration in addition to recovering from the impact of COVID-19.
Establishment of the “Community Ownership Fund”
The £150 million fund will help communities protect and take ownership of local assets such as pubs, theatres, and sports clubs at risk of loss.
Opening of the “Levelling Up Fund”
The prospectus for the £4.8 billion fund will be published today, providing guidance for local areas on how to submit bids for the first round of funding starting in 2021-22.
Freeports to be established.
The Government will provide incentives such as cheaper customs and lower taxes. The first eight freeport locations are as follows:
- East Midlands Airport
- Felixstowe and Harwich
- Liverpool City Region
Increased funding for the devolved administrations
Funding will be increased by £1.2 billion for the Scotland Government, by £740 million for the Welsh Government, and by £410 million for the Northern Ireland Executive.
Accelerated city growth deals for Scotland and Wales
Three city growth deals in Scotland (Ayrshire, Argyll & Bute, and Falkirk) will receive funding more quickly while three city growth deals in Wales (North-Wales, Mid-Wales, and Swansea Bay) will also receive funding more quickly.
£10m to support veterans with mental health needs.
Veterans will be provided with much needed mental health support.
Survivors of the thalidomide scandal will receive new lifetime funding.
A £40m down payment will be set aside for victims of the Thalidomide scandal, but funding will continue in perpetuity.
Government guarantee for 95% mortgages
95% mortgages will be guaranteed by the government as part of government plans to turn “generation rent into generation buy”. The country’s largest lenders including Lloyds, NatWest, Santander, Barclays, and HSBC will be offering these 95% mortgages from next month, more, including Virgin Money will follow shortly thereafter.
An extra £1.6 billion in funding for the vaccine rollout
This is to ensure the continued success of the rollout and improve future preparedness.
The Chancellor will give a press conference at 5pm today.
- Budget 2021: documents (here)
- Rishi Sunak speech (here)
- Treasury Press Release (here)
- Build Back Better: our plan for growth (here)
- Independent review recommends reforms to UK Listing rules to boost growth and markets (here)
- Policy Design of the UK Infrastructure Bank (here)
- OBR Economic and fiscal outlook – March 2021 (here)
- Income tax and National Insurance contributions (here)
- Guidance on how local areas can submit bids for the Levelling Up Fund (here)
- Corporate tax rates and small profits thresholds from 2023 (here)
- Super-deduction (here)
- Recovery Loan Scheme (here)
- NIC Infrastructure, Towns and Regeneration Study: Terms of Reference (here)
- The mortgage guarantee scheme (here)
Calls for evidence: