Budget 2021: Package sets scene for ‘stagnant’ standards of living over next five years

Rishi Sunak uses windfall to boost Whitehall spending as UK recovers from pandemic

Andrew Woodcock
Political Editor
Thursday 28 October 2021 01:13
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Budget 2021: Economy will return to pre-Covid levels at the turn of year, Sunak says

Families face five years of “stagnant” standards of living after a Budget which restored some of the cash cut from public services over the past 11 years of Conservative governments but did little to address Britain’s cost-of-living crisis.

Chancellor Rishi Sunak said that his first budget since the removal of Covid restrictions would lay the foundations for “an economy for a new age of optimism” as the UK emerges from the pandemic.

Taking advantage of a £35bn windfall from improved economic forecasts, he announced additional annual spending of £25bn by 2022-23, with all Whitehall departments receiving real-terms increases in their budgets in what amounted to a giveaway package after a decade of austerity.

He also hiked the national living wage by 6.6 per cent to £9.50 an hour, benefitting 2 million low-paid workers. And he slashed £7bn from business rates, including a 50 per cent one-year discount for the retail, hospitality, and leisure sectors, which have been among those hit hardest by Covid.

But there was no help for families with escalating heating and food bills, as gas prices soar to record levels and inflation expectations were upgraded to 5 per cent.

And a £2bn boost to universal credit – cutting taper rates to allow working claimants to keep more of what they earn – fell far short of replacing the £6bn slashed from the benefit only last month, when Mr Sunak removed the £20-a-week uplift introduced to help the poorest households through the pandemic.

The chancellor also came under fire from environmentalists for freezing petrol duties for the 12th year in succession and for cutting tax on domestic flights, just days before the United Nations Cop26 climate change summit in Glasgow is set to begin.

Environmental charity the WWF said the moves “take us headlong in the wrong direction when it comes to tackling the climate and nature crisis”.

In the biggest overhaul of alcohol duties for 140 years, Mr Sunak cut 3p from the price of a pint of beer drunk in a pub, but increased duties on high-strength beers and ciders to match those on spirits, while removing a long-standing premium on sparking wines like champagne and prosecco.

Mr Sunak told the House of Commons that his autumn budget “delivers a stronger economy for the British people. Stronger growth, with the UK recovering faster than our major competitors. Stronger public finances, with our debt under control. Stronger employment, with fewer people out of work and more people in work.”

But Labour’s shadow chancellor Rachel Reeves denounced the package as “a classic con game”, saying that the 1.25 per cent hike in national insurance rates for employers and employees, intended to pay for the NHS and social care, was announced in advance to make the Budget itself seem more generous.

“The chancellor in this Budget has decided to cut taxes for banks,” said Ms Reeves. “So at least the bankers on short-haul flights sipping champagne will be cheering this budget today.

“And the arrogance, after taking £6bn out of the pockets of some of the poorest people in this country, expecting them to cheer today for £2bn given to compensate. In the long story of this parliament, never has a chancellor asked the British people to pay so much for so little.”

The director of the independent Institute for Fiscal Studies (IFS) think tank, Paul Johnson, said that household incomes were projected to be “pretty stagnant” over the next five years, with real growth of less than one percentage point per year over the period. Middle earners are set for a 1 per cent fall in the value of their take-home pay next year.

“That’s partly because of inflation, that’s partly because of the big tax rises that we’ve seen imposed, that’s partly because growth is so poor,” said Mr Johnson. “And that’s really very disappointing because, remember, we’ve had a decade of pretty stagnant living standards.”

He warned: “Those almost non-existent increases in living standards over the next half-decade are a big blow to all households, and families of course, but they can also have a big impact on politics.”

The CEO of tax and advisory firm Blick Rothenberg, Nimesh Shah, said that taking into account changes to tax rates, allowances and thresholds announced earlier in the year, a family of four with one working parent earning £62,000 will be £649 worse off per annum in 2022-23 than in 2010-11.

Mr Shah said: “There was some limited respite for families – freezing of fuel duty, an increase in the national living wage to £9.50, and a change to the mechanism for tapering universal credit. But it doesn’t go far enough, especially with a 1.25 per cent increase to national insurance coming next April.”

And TUC general secretary Frances O’Grady said families were still facing “a triple whammy of a £1,000 universal credit cut, tax hikes and fast-rising energy and food bills”.

“The chancellor has gone from pay freeze to pay squeeze,” said Ms O’Grady. “The chancellor admitted that we will have zero pay growth across the economy next year. And he has no plan to get real wages rising for everyone after an 11-year pay squeeze, with average real pay growth over the next four years predicted to be just 0.3 per cent.”

Mr Sunak was given leeway for generous increases in the budgets of Whitehall departments by significantly improved forecasts from the Office for Budget Responsibility (OBR).

The independent forecaster upgraded its 2021 growth projection from 4 per cent in March to 6.5 per cent now, while cutting the predicted unemployment peak from 6.5 per cent to just 5.25 per cent this winter, thanks to a stronger-than-expected recovery from Covid.

The OBR’s forecast for medium-term “scarring” to the UK economy from the pandemic was adjusted downwards from 3 to 2 per cent of GDP. And borrowing this year was revised down by just over £50bn – though it is still forecast to be £183bn, higher than in any year outside wartime except for during the financial crisis and the Covid pandemic.

Some £15bn a year from the £35bn windfall was directed to spending departments, including health, transport and “levelling up” – though the money was front-loaded to deliver a pre-election bonanza in the years 2022-24 before being reined in sharply after the general election, which is expected to be held in 2024.

The remaining £20bn was held back to help the chancellor meet new fiscal rules to stop borrowing for day-to-day spending and to put debt as a percentage of GDP on a downward path within three years.

Mr Sunak also prepared the ground for pre-election tax sweeteners, saying his goal was to cut the overall tax burden – with taxes currently at their highest level since the 1960s as a proportion of GDP – by the end of the parliament.

He went further in a meeting of the 1922 Committee of Tory backbenchers by telling them he wants to use "every marginal pound" in the future to lower taxes rather than increase spending.

Aides declined to say how this would be done, but indicated that the chancellor would aim to use any changes to reward work.

The Liberal Democrats said that a cut from 8 to 3 per cent in the banking surcharge announced by Mr Sunak would cost the Treasury £3.8bn over the next four years, compared to £1.8bn of catch-up funding for schools in today’s budget.

Party leader Ed Davey said: “This was an out-of-touch Budget that is taking ordinary families for granted, hiking up people’s taxes while failing to help them with soaring energy bills this winter. We’ve seen a lot of spin, but very little on the three big crises we face: the cost of living, the climate emergency and children’s lost learning.

“Parents are crying out for the catch-up funding our children desperately need. The chancellor let them down today, offering less in extra catch-up funding than his tax cut for the big banks.”

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