Today’s Budget was largely as expected. Much of the content had been flagged beforehand, and then there were the big manifesto pledges that were off limits. But that’s not to say it wasn’t a significant Budget, and it may indeed be the last, or penultimate, big spending Budget. Rishi Sunak today announced £37.5billion of spending in the current financial year and the next. Apart from last year’s Budget, it is, by any historical comparisons outside of the pandemic, a huge amount of spending. What’s concerning though is that spending in future years is going to be cut at progressively larger amounts, and next April will therefore herald the start of four consecutive years of public spending cuts. On the tax front, there were further cuts or extensions of existing tax cuts in some areas but also tax rises in others.
Indeed, in 2021/22, alongside the huge amount of spending, there are also very large cuts in tax to stimulate a recovery. However, there is then a phasing out of tax cuts and a phasing in of tax rises. Indeed, with regard to the tax rises, we are only now seeing the thin end of the wedge. From 2023/24, the increase in tax will significantly outweigh any reductions. This means a swing of almost £37bn in the space of two financial years, from £24bn of tax cuts in 2021/22 to £12.8bn of tax rises in 2023/24. And this doubles in the subsequent year.
On the spending front Mr Sunak will be dubbed the Big Extender, as most of the big announcements were extensions of existing schemes. The biggest spending item announced today related to self-employment grants, amounting to almost £12.8bn. The extension of the Job Retention Scheme is also a big outlay, amounting to £7bn. Meanwhile the extension of the business rates holiday in England will cost £8bn. But it remains to be seen what the NI Executive does with the money it receives in Barnett consequentials. In total, the NI Executive will receive £410m according to the Chancellor (£3.7bn since the onset of Covid). In other spending extensions, the temporary increase in Universal Credit of £20 per week has been extended for six months, but there is a concern around the impact on many households, particularly in Northern Ireland, whenever this expires at the end of September. The extensions though weren’t just to spending. There were also extensions to tax cuts which included the continuation of the VAT cut for the hospitality and leisure industry, meaning a VAT reduction for another 12 months, which will cost £4.7bn.
Perhaps the biggest announcement of the day though was the ‘Super Deduction’ aimed at stimulating business investment. It will mean a 130% tax allowance for capital investment by businesses over the next two years. This is a massive commitment of over £29bn. This will hopefully act as a much needed defibrillator for private sector investment in Northern Ireland where under investment has been a long-standing problem. But it was not all one-way traffic for businesses as there was also an increase in corporate tax announced. The top rate will rise from 19% to 25% meaning firms that make over £250,000 in profit will pay more – incidentally at twice the prevailing rate in the Republic of Ireland.
The Super Deduction to capital allowance stole the headlines, but freezes to tax thresholds could be dubbed the super income deduction. This so-called fiscal drag means more and more people will be dragged into paying higher rates of tax as the bands, or thresholds, fail to move up in line with inflation. This will bring in an additional £19bn over the next five years. Pension lifetime allowance, and the annual capital gains tax allowance were also frozen until 2025/26. The VAT registration threshold and the annual tax-free ISA limit were frozen for two and one years respectively.
Whilst Sunak under wrote the labour market with the two employment support schemes which will keep unemployment down, he also underwrote the housing market with a series of initiatives which will keep prices up. This included the extension of the Stamp Duty holiday to October and the government guarantee on 95% mortgages. This though is perhaps a mixed blessing for first time buyers. Prices in Northern Ireland were already rising firmly and first time buyers were perhaps wanting the market to cool. This announcement provides another adrenalin shot for the market that will keep upward pressure on prices into next year.
Overall, the Budget includes a lot of big numbers. But are they going to be enough to secure the recovery? There will be a cliff edge on public spending once the Covid-19 support measures come to an end. At this stage, the legacy of Covid will continue and many of the economy’s underlying challenges will come to the fore. This provides a difficult context, and the thicker end of the wedge on taxation is still to come.