What to Expect From Rishi Sunak’s Budget

Written by Mario Laghos – 28th February 2021

The Chancellor of the Exchequer, Rishi Sunak, is set to deliver the budget on Wednesday, the 3rd of March at around 12.30 PM GMT. The Chancellor’s Parliamentary address will mark the first budget since March of last year, after the planned Autumn budget was cancelled in September, amid a surge of Coronavirus cases.

We won’t know the exact contents of the budget until Sunak delivers his Parliamentary address, Chancellors are notoriously tight-lipped about the specifics of their plans. But Sunak has in the run-up to March 3rd been touring the television studios dropping hints to pre-emptively shape the media narrative, and his own interviews corroborated with press reports mean we can be confident of the following featuring in the March budget:

  • A return of the ‘eat out to help out’ scheme. The Chancellor has signalled that the budget will mark a return of last summer’s eat out scheme which encouraged the consumer to dine out on the government’s dime. Eat out to help out subsidised meals at registered hospitality venues by 50%, up to £10, per person. The initiative will likely return with a so called ‘sin tax’ cut – the Chancellor is reportedly considering cutting alcohol duty in restaurants, pubs, clubs and bars.
  • A Universal Credit uplift extension. At the onset of the Coronavirus pandemic, the government uprated universal credit welfare payments by £20 per week, and uprating worth more than £1000 per year for those in receipt of it. The Chancellor is set to extend this update for a further six months.
  • An extension to the furlough scheme. The Chancellor has been very clear that his top priority is to ensure the continued viability of jobs and businesses that would in ordinary circumstances be in the black. For this reason, it is a certainty that the furlough scheme, a programme which involves the government paying the wages of employees whose workplaces are dormant, will continue until the Summer.
  • An increase to corporation tax. We can be confident of seeing a rise in the UK’s rate of corporation tax. At 19%, the UK’s corporate tax rate is at present the lowest in the G7. We can expect to see this rate rise to between 23 and 25%, an increase which will likely be staggered over the course of this Parliament, which is set to dissolve in 2024.
  • An infrastructure package. The Chancellor looks set to announce a significant infrastructure package, which could be as large, if not larger than some £20 Billion in expenditure.
  • Regional mayors have been busily engaged in the business of bidding for so called ‘freeports’ for their localities. Freeports would create zones wherein goods could be imported under a special tariff regime, which would diverge from the national standard. The Chancellor is expected to announce which bids have been successful.
  • A lot more besides. There is talk of a rebalancing of the tax code to incentivise new manufacturing plants, a new ‘help to buy’ scheme, an expansion of the apprenticeship programme, a reported freeze on income tax thresholds rising, and the prospect of a digital services tax to buoy the competitiveness of brick-and-mortar stores.

Political considerations

The Conservative government was elected on a clear promise to ‘level up’ Britain. Their campaign focussed on left behind and deindustrialised regions, particularly in the North of England and in the Midlands, and its these areas that awarded Boris Johnson his landslide victory in 2019. But given that the pandemic has demanded an all of the government response, and with time ticking away, the government are running out of time to deliver on their commitments. They will be keen to kickstart the economy and get on with large infrastructure projects, such as new hospitals, bridges, roads tunnels and railways, to increase productivity, breath life into left behind regions, and to put themselves on good footing come the time of the next election.

The economic interventions of the past year, and the budget to come, mark a clear departure from the orthodox Conservative party policy. The Government have insisted that there will be no return to austerity’ – the programme of public spending cuts pursued by David Cameron and George Osbourne – and instead, recovery will be titillated by investment and tax increases on those with the broadest shoulders. This U-turn has taken place not just because of the Tories’ new voting coalition, which is now heavily working class, but because of an implicit admission that the austerity programme failed to achieve its self-declared ends. Previous Conservative Governments justified their corporate tax cuts with reference to the economic principle of the ‘Laffer curve’. Proponents of Laffer’s theory argue that a reduction in the tax rate leads to an increase in revenue. That the Government are confident in raising a reported £12 from a corporate tax hike would indicate that if Laffer was right, previous Chancellors got the rate wrong.

A black hole in the public purse

With the national debt now approaching 100% of GDP at breakneck speed, it’s imperative to start to revive the economy and increase revenue. The measures in the budget will seek to jumpstart the economy and broaden the tax base, by incentivising economic activity and getting people back into work. The hope is that spending on infrastructure projects now will reap dividends in the future, as the projects will increase productivity and make the UK a more attractive prospect for investors.

Moreover, the scale of the debt now means that the UK is more vulnerable to a change in the interest rates than it had been previously. Although it is still relatively cheap to borrow, and therefore advisable to invest in the economy now, a minor change to the interest rates could significantly hike the UK’s repayment rate. The Chancellor is keenly aware of this, and measures such as an income tax threshold freeze are aimed at bringing enough money into the kitty by broadening the tax base so that we don’t end up in a situation wherein we spend more servicing the debt than we do on the NHS.

This budget will be interventionist and spend heavy, but keenly focused on a set of clear objectives. It seeks to arrest the collapse in the hospitality sector brought about the Coronavirus lockdowns. It looks to shore up and boost British manufacturing, the vaccine wars having served as a practical demonstration of the dangers of a supply-side dependency. It aims to assure the prospects of the High Street into the future, as the decline of brick-and-mortar has been exacerbated by lockdown and the rise of Amazon. It will look to kickstart the economy and increase productivity as a way to pay down the perilously large national debt without recourse to cutting essential government programmes. And it will seek to make good on the promises that were made to the electorate back in 2019. If the Chancellor follows through on a corporate tax hike, a windfall tax, a generous infrastructure package, and a rescue package for hospitality, then this budget will mark a strong first step on the road to recovery.

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