Listening to Rishi Sunak deliver the Budget and 2021 Spending Review, you would be forgiven for forgetting that the last 18 months have seen some of the most turbulent economic times with the UK’s public finances being left in a pretty precarious state.
In heralding the arrival of “an economy fit for a new age of optimism” the Chancellor seems to have taken close note of the Prime Minister’s boosterish attitude and concluded he wants a piece of the action.
That’s not to say some of his optimism is unfounded. The unexpected speed at which the economy has bounced back from the impact of the Covid-19 pandemic, with the OBR upgrading predicted growth for this year from 4% to 6.5%, provides the Chancellor with some of the flexibility he has used to announce significant spending commitments.
With this additional money burning a hole in his pocket, combined with greater receipts from the rise in Corporation Tax announced earlier this year, there is certainly something reminiscent of the Blair/Brown approach towards tax and spend.
The new spending includes £5.9bn to NHS England to clear the waitlist backlog, £6.9bn for a “local transport revolution”, a £3.8bn prison-building scheme, £5bn to remove cladding from high-risk buildings, £3bn for post-16 education, a £1.8bn regeneration investment to support housebuilding amongst a raft of other spending pledges.
With the economy expected to return to pre-Covid levels by the end of this year, total departmental spending will now increase by £150bn over the remainder of this Parliament, amounting to a significant 3.8% annual increase – certainly no return to austerity.
On the tax side, seeking to demonstrate some Thatcherite credentials and hoping to exploit the “Brexit dividend”, Sunak announced a total of £7bn of tax cuts for businesses, including a new 50% business rates discount for those in hospitality, retail and leisure up to a maximum of £110,000 in 2022, as well as a freeze on fuel duty and reforms to Tonnage Tax, Air Passenger Duty and alcohol duties.
There was a sting in the tail, however, with a three-year delay to the £22bn annual R&D spend target to 2026 and the Chancellor acknowledging that the tax burden is rising to its highest level as a percentage of GDP since the 1950s.
Overall, in doubling down on the Prime Minister’s commitment to make the UK an economy of higher wages, higher skills, and higher productivity the Chancellor has placed his flag firmly in the ground alongside Boris Johnson.
This will worry some of his Conservative colleagues, some who feel the drive towards higher wages will result in a self-perpetuating circle of rising inflation and rises in the cost of living, and others who remain concerned that the Conservatives will no longer be seen as the party of the small state and low taxes.
To that end, the Chancellor also announced new fiscal rules in the form of a new “Charter for Budget Responsibility” which will state that underlying net debt must be falling as a percentage of GDP and, in normal times, borrowing can only be for infrastructure investment, with day-to-day spending being funded only through taxation. Whether this will be enough to placate some of the Chancellor’s colleagues remains to be seen.
The elephant in the room is, of course, the next General Election.
Although not due until 2024 – in theory there are only two more Budgets before that – there is significant pressure to be making progress now, to getting shovels in the ground, so that come next polling day, those first-time voters who delivered the 2019 landslide can see the tangible benefits their vote led to.
The Chancellor and his team will probably be reflecting on a job done, whether it was done well or not remains to be seen and only after the finer detail of the Budget is pored over in the hours and days ahead.
Catch up on our budget analysis breakfast below:
Leader of the Opposition is a thankless job at the best of times. It is at its particular worst on Budget Day when due to the theatre of the event, the Leader of the Opposition is forced to respond to the Budget immediately after hearing it for the first time.
Today was made even more difficult for the Labour Party, and not just because Rachel Reeves, the Shadow Chancellor, had to stand in for self-isolating Keir Starmer at the last minute. No, it was made harder because a lot of Sunak’s Budget was in effect a repudiation of Conservative policy over the past decade – and indeed, it’s not hard to imagine vast swathes of it being delivered by a Labour Chancellor.
As it happens, Reeves made a convincing impromptu debut with a quick-witted opening reference to the Budget as one for ‘the bankers, sipping champagne on their short haul flights’, reflective of her skill as a seasoned Commons orator. Her response also provided a clear indication of where Labour is going to set its economic stall ahead of the next election. The party now recognises that it can’t out-spend a Conservative Party who has suddenly found common kinship with the Magic Money Tree, but it can promise better value spending and better-run public services.
The question which remains is whether this more technocratic argument will be enough to combat Boris Johnson – and now Rishi Sunak’s – boosterism.
Current state of economy/OBR forecasts
Strengthening the public finances
Culture and heritage
Education system “for all”
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