UK Budget: Sunak gambles on spending spree ahead of pre-election tax cuts

UK Finance Minister Rishi Sunak on Wednesday gambled on a budget spending package to help Britain recover from the Covid pandemic with a string signal that tax cuts would arrive before the next election.

Sunak was given £51bn in headroom as economic growth forecasts were revised upwards to 6.5% for 2021 and tax receipts were higher than expected.

The revision compares with previous forecasts by the independent Office for Budget Responsibility (OBR) of 4% for 2021 after a plunge of 9.9% in 2020 – the worst recession in three centuries. It is then expected to grow by 6% next year, 2.1% in 2023, 1.3% in 2024 and 1.6% in 2025.

It also allowed Sunak to partly reverse his unpopular decision to cut universal credit payments, reforming the taper rate at which the benefit was reduced. The measure was costed at £2bn, but will only apply to those in work.

Earlier this month the government axed the £20-a-week uplift in universal credit, part of its emergency Covid support package, and in one stroke slashed the incomes of 6 million claimants by £1,040 a year at at time when they faced rising energy and food prices along with a tax rise next April.

Multi-millionaire and former hedge fund manager Sunak has earned a reputation as a tax raiser, introducing a hefty rise in corporation tax to 25% from 19% and a stinging, promise-breaking increased in national insurance contributions. As a result the OBR calculated that taxes as a share of national output are the highest since the early 1950s.

However, he made no secret of the fact that he believed in a small state, and wanted taxes to fall, which would appeal to voters and Tory backbenchers who see him as a potential and more substantial successor to Boris Johnson as prime minister.


The spending pledges were also a rejection of the austerity policies of George Osborne, which slashed departmental spending and stunted economic growth for more than a decade.

However, the net result of this largesse means that even with the cash splashed out on Wednesday, most government departments, such as education, and the long-suffering local government sector, are well behind where they were in 2010.

Sunak said the OBR had revised down its forecasts for the long term hit to the economy from the pandemic to 2% of GDP from 3%, but still above the Bank of England’s figure of 1%.

However, inflation was likely to average 4% for most of next year, up from its current level of 3.1% while unemployment was forecast to peak at 5.2%, down from a forecast for about 12% forecast last year.

He unveiled a new set of fiscal rules for the public finances, not dissimilar to those introduced by Labour’s Gordon Brown in 1997, stating that debt must fall as a percentage of GDP, with the state only borrowing to invest in future growth and everyday spending balanced by the third year of each forecast period in normal non-pandemic circumstances.

Borrowing in the current financial year, 2021-22, will be 7.9% of GDP, and will fall to 3.3% next year. In March, the OBR estimated a budget deficit of £233.9bn for 2021-22, or about 10.3% of GDP.

Underlying debt was forecast to be 85.2% of GDP this year, Sunak said. It will rise to 85.4% of GDP in 2023 before peaking at 85.7% in 2024 before falling in the final three years of the forecast to 83.3% from 85.1%.

He added that a levy on developers with profits of more than £25m, worth 4%, would help fund a £5bn pot to remove unsafe cladding on buildings in response to the Grenfell tower fire that killed 72 people.


In a move likely to anger climate change campaigners, and just ahead of the Cop26 climate change summit in Glasgow next week, domestic air passenger duty was halved from April 2023, benefiting 9m passengers. This was offset with a rise at the same time for ultra long haul flights of more than 5,500 miles – economy travellers will pay an extra £91.

Retail and leisure business were handed a one-year 50% cut in business rates up to £110,000, Sunak said.

Banks were also handed a boost as the the surcharge levied on their profits was slashed to 3% from 8% from April 2023. This would offset the impact of a rise in corporation tax to 25% from 19%.

Pubs and brewers were handed a 5% cut to duty on draught beer and cider served from draught containers of more than 40 litres, equating to a permanent cut in the cost of a pint of 3p.

New measures, which cut the UK’s main duty rates on alcohol from 15 to six, will lower taxes on low-strength wines, such as prosecco, beers and ciders, and push up the cost of high-strength beverages.

Across Whitehall, departmental spending was set to rise by £150bn in this parliament, which Sunak claimed was the “largest increase this century”, with outlay growing in real terms by 3.8% a year.

However, the Institute for Fiscal Studies said average real-term annual growth in departmental resource budgets was higher in previous years, above 5% in 2000 and 2002 under Labour, and 4.3% under the Conservatives in 2019.

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