Budget 2021 & Spending Review – A New Age of Optimism?
The Chancellor introduced his Budget with some very upbeat economic headlines. These include increases in employment, investment, and wages, decreases in national debt, and a greater general stability to the public finances. In this light, Mr Sunak felt entitled to talk about a “new age of optimism”. But does that stack up?
A focus on the general positive economic outlook perhaps explains the absence of detail about how Mr Sunak is planning to pay for the numerous spending pledges made in the announcement. Growth and employment figures are undoubtedly better than anticipated at the height of the pandemic, and Mr Sunak is right to take credit for some brave decisions made during 2020. But questions will be raised about how fully these new pledges will be funded, dependent as they are on a still fragile economic recovery. This is bought into focus particularly by the absence of any significant new tax raising measures - unsurprising perhaps given the recent and well-publicised tax hikes including the Health and Social Care Levy.
Instead, the Chancellor spent a fair proportion of his presentation talking about tax cuts and rate freezes. These are without doubt good news for those impacted, particularly the discounts for business rates, and the reduction and simplification of alcohol duties – two measures that will positively affect the troubled hospitality and retail sectors.
There was also good news for the minority of people and businesses impacted by tonnage tax and passenger air duties, but perhaps most interesting were the tantalising hints Mr Sunak gave about the potential for future tax cuts. This will be music to the ears of Tory backbenchers, given their sullen acquiescence to recent tax rises. This is because all of the Chancellor’s positivity today does not quite manage to disguise the truth that the tax burden remains at its highest for more than a generation. While the economic recovery remain fragile, it is going to take some time before this situation improves.
Some other positives from the announcements involved changes to the Universal Credit, including an increase in the amount that individuals can earn before the credit is impacted, and improvements to the “taper” meaning that recipients now retain more for every pound earned over the threshold. This, coupled with increases in the national minimum and national living wages, will be seen as helpful for working families and those on lower incomes. However, this generosity comes with a price tag. In particular the increases to the national minimum and living wages will be borne entirely by employers, many of whom are already struggling with wage and price inflation.
So is the government’s optimism merited?
The Chancellor made the case for strong growth as the quickest route to mending the public finances, and he has been buoyed by recent positive economic news. But time will tell whether that optimism is well placed or whether obstacles in the path to post-pandemic recovery are going to be more of a challenge than he is anticipating.
If you are interested in hearing more on this Spending Review's announcements, our tax partner Adrian Young is hosting a reflective seminar on the Budget this Friday, starting at 8:30am at HURST's Stockport Office. If you'd like to sign up, or would like more information, click here!