With the end of the pandemic hopefully near, the Chancellor clearly set out the fiscal damage to the UK economy and that the road to recovery will be a long one.
The UK Chancellor delivered his second full Budget on 3 March 2021.
It was another sterling performance from Rishi Sunak, full of candour about the problems the country faces, but also bristling with initiatives and tax incentives to rebuild the economy and make it more productive and pro-growth.
As we hopefully start to exit the pandemic, it struck an upbeat and positive tone that hopefully will have resonated with citizens and businesses weary after a year of repeated lockdowns. However, few will be under any illusions about the scale of the fiscal damage to the UK and the time it will take to repair it.
In his first Budget, delivered on 11 March 2020, the Chancellor faced his first big test – the emerging pandemic that within a few weeks became the COVID-19 crisis. In what turned out to be a masterpiece of understatement, Sunak announced last year that ‘There is likely to be a temporary disruption to our economy’ and also that the Government’s response would be ‘temporary, timely and targeted’.
The underlying assumption in his 2020 Budget was that up to 20% could be off work at any one time, and the measures he announced involved improving sick pay and help for business rates. But there was no mention that the UK might have to face a national lockdown. However, two weeks later, that is exactly what happened, and the support announced in that 2020 Budget was clearly going to be nowhere near enough to stem what was rapidly turning into an international emergency.
The focus of the Government’s efforts then shifted to designing and implementing huge relief operations in the form of measures such as the Coronavirus Job Retention Scheme (CJRS) and the Self-employment Income Support Scheme (SEISS), together with a whole host of other relief measures. Even then most of us, Sunak included, expected that the emergency would be relatively short-lived and the need for these schemes would be temporary.
How wrong we were. The crisis has seen the biggest fall in GDP for over 300 years, exceeding those seen even in wartime. A year on, we are stuck in a third national lockdown and it is only now, with vaccines being rolled out on a colossal scale, that we can see some light at the end of the tunnel.
This time around the difficulty Sunak faced was to build a recovery and raise more money from taxes when, in the December 2019 election, his predecessors had promised not to raise the main rates of income tax, VAT and national insurance. Truly, it is not easy to be Chancellor – all the more so when you face an existential crisis with your hands tied behind your back. But if he was nervous is didn’t show.
As mentioned above, central to the government’s response to the pandemic have been the CJRS and SEISS support schemes. As had been widely predicted, both schemes have been extended until 30 September 2021.
The Chancellor also announced a three-month extension of the business rates holiday from 1 April 2021 to 30 June 2021. Thereafter, for the remainder of 2021/22 (ie, nine months) businesses will enjoy 66% rates relief up to a cap of £2m per business.
It had been widely trailed that a rise in corporation tax might be on the cards, although this needed to be balanced with not stifling businesses as they recover from the pandemic. Rather than an across the board increase in the corporation tax rate, the Chancellor went for a selective approach which will reintroduce a more complicated two rate system which was abolished in 2015 in favour of only one rate.
The headline rate will be increased from the current 19% to 25%, but not until April 2023 and only for companies will profits of £250,000 and more. Further, we will see the return of the small companies’ rate, as companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between these two figures being subject to a tapered rate. This limit is far lower than the £300,000 threshold which existed up until it was abolished in 2015.
In a major announcement aimed at improving growth and productivity, the Chancellor announced a two year ‘super deduction’ of 130% of investment by companies in plant and machinery.
With the triple lock in place, the Chancellor’s room for manoeuvre was rather limited. It had been expected that personal allowances might be frozen but, as the increase was already coded into payroll systems, this would have required expensive changes to be made.
In the event, he decided to leave the increase for 2021/22 as planned but to freeze it from April 2022 and for the rest of the review period: this takes him up to 2025/26, which is beyond the life of the current parliament.
He also took the opportunity to freeze other allowances including the CGT annual allowance, the IHT threshold and the pension annual allowance (all to 2025/26) and the VAT registration threshold (to 2023/24 only).
Although there had been suggestions that tax rates on the self-employed might increase, in the event no announcement was made.
No major changes were announced to VAT. However the temporary 5% VAT rate, which applies to tourism and the hospitality industry, has been extended to 30 September 2021 and there will then be a 12.5% rate for the next six months before the rate reverts back to 20% from 1 April 2022. The need to make two changes to sales and accounting systems rather than one will increase costs for businesses – hopefully the benefit of the reduction will outweigh the costs of making the changes!
What is the impact of all this on the nation’s finances? In a word, dire. The public finances were not in the best of shape before the COVID-19 crisis started because the UK has run budget deficits in most years since 2000. We all expected that the COVID-19 crisis would have a severe impact on public spending estimates, but few would have anticipated by how much. The figures released at the time of the Spending Review on 25 November 2020 gave a hint of what we could expect in this Budget – net spending for 2020-21 was forecast to rise by £284bn, with a further net spending in 2021-22 of nearly £40bn.
In this Budget, these figures have been revised and, as you might expect given that we are now in another lockdown, the costs have increased further. For the year 2020-21 the increase is relatively modest – only £6bn which, in the context of the pandemic, is small change. However, the cost for 2021-22 has now been increased by nearly £59bn. Adding these two figures together gives total revised costs of £290bn for 2020-21 and £99bn for 2021-22, very close to the number quoted by the Chancellor in his Budget speech of just over £400bn.
To put this extra spending in perspective, in 2020-21 receipts from the two largest taxes, income tax and VAT, were £208bn and £161bn respectively, closely followed by NICs at £150bn.
According to figures published by the Office for National Statistics in January 2021, the public sector net debt had reached £2,115bn. In other words, the total UK debt now exceeds 2 trillion pounds, a figure so large it is very difficult to imagine but, if our maths is correct, equals over £30,000 for each and every UK citizen. All commentators appear to agree that this debt level is unsustainable. However, scaling this debt mountain will require a long-term commitment and considerable courage while trying to avoid taxes rises that choke off the economy and the all important need to boost growth and productivity.
With the UK emerging from the biggest crisis ever faced in peacetime, this was not the time to scare the horses. Support for businesses and employees impacted by COVID-19 was extended but the rise in corporation tax and future freezing of allowances, including the personal allowances, will make little dent in the size of the deficit. It seems highly likely that the Chancellor will have to return to this pressing problem in earnest once the economy starts to improve.
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