The autumn 2021 budget arrived with the economy in a better place than expected, thanks to the success of Covid-19 vaccines keeping hospital admissions from overwhelming the NHS. This gave the chancellor more to play with than anticipated. Overall, it was a cautious budget, leaving room for manoeuvre towards the end of the parliament.
Help for working people
There were several welcome, albeit relatively small in scale, new measures for working people.
- The rise in the minimum wage to £9.50 per hour as well as the cut in the taper rate of universal credit will go some way to reducing the impact of the £20 per week withdrawal for those in work. Unfortunately, it does nothing for those struggling the most.
- The public sector pay freeze was removed, however wage increases will not keep track with inflation, so public sector employees will see real reduction in wages and spending power.
For businesses, an increase in the living wage will be an unwelcome additional cost. There were some targeted changes to tax rates.
- Temporary relief on business rates for retail and hospitality that may temporarily delay or reduce an expected surge in commercial rent defaults and retail business failures over the near future.
- Also, the increase in the business rates multiplier will be cancelled for 2022 as well as relief for companies investing in premises.
- A baffling tax reduction on the banking surcharge from 8% to 3% – presumably to act as a sweetener for an industry hit by a damaging Brexit deal.
- A 4% surcharge on housing developer profits over £25m will part-fund post-Grenfell cladding remediation needs.
Levelling up and climate change
As expected, there were several announcements on infrastructure and investment.
- Very welcome funds for regional infrastructure, including £21bn on roads and £46bn on railways. Unfortunately, much of the value quoted is not new money.
- The return of education funding per pupil to 2010 levels, unwinding a decade of cuts.
- £1.7bn for the government’s levelling up fund to regenerate designated cities.
- £20bn investment in R&D by 2025.
There was no mention of the climate crisis in today’s announcement, other than a senseless reduction in domestic air passenger duty that flies in the face of climate targets. Last week the net zero strategy was hailed as a disappointment by industry commentators as not near the scale needed. The country desperately needs to invest at least 1% of GDP starting now to have a chance of meeting its climate change targets.
Exploding common myths
Unfortunately, many common myths around good economic management still need to be addressed. The UK remains the most impacted of the G7 economies – around 6% below its pre-pandemic GDP path.
As well there are major inaccuracies around debt. Government debt as a % of GDP is a largely meaningless statistic. What matters is that the cost of servicing that debt remains low. Even with higher inflation debt servicing costs remain low by historical standards. Moreover, since the rise of Quantitative Easing, the Bank of England now owns nearly 40% of all government gilts – and repays the profit it makes back to the Treasury.
When the decision is cast as a need to “fix” public finances the impact will be the same as in the 2010s: it cut off the recovery and reduce productive capacity in the economy. The best way to bring down the debt is to invest now that boosts long-run growth and productivity.
With the economy in a better place than 3 months ago but feeling impacts of inflation, shortages and uncertainty, the budget was an opportunity to provide a level of investment that meets the needs of the future and put us on a path towards sustainable growth.
The OBR anticipates a decade of stagnating disposable income growth coupled with higher inflation. Tax increases over the last 12 months are the largest since the aftermath of Black Wednesday in 1993 and takes the overall tax burden to the highest level since the 1950s. The expectation is now for tax cuts towards the end of the parliament.
While there were some welcome small-scale initiatives, this was another opportunity missed to answer the big challenges of the future.