Budget 2021: Rishi Sunak sets out ‘moral’ mission to limit state and cut taxes

Rishi Sunak has claimed he is on a “moral” mission to cut taxes and halt the inexorable growth of the state but only after a Budget in which he set out plans for taxes to rise to their highest level in more than 70 years.

The UK chancellor used his third Budget to pump more money into public services recovering from the Covid-19 crisis and protect them from rising inflation, increasing departmental budgets by 3 per cent a year in real terms over the next three years.

But taxes are heading for the highest level since 1950 and the Conservative government plans to go to the next election in 2024-25 with public spending accounting for 2.5 per cent more of the economy than in 2019-20.

Boris Johnson, prime minister, has insisted on higher spending to meet government promises to spread prosperity to “left-behind regions” and to boost productivity to deliver his promised “high-wage, high-skill economy”.

One former Tory cabinet minister said Sunak “sounded like Gordon Brown”, the former Labour chancellor. But Sunak concluded his speech by reassuring Tory MPs that he wanted to cut taxes before the next election saying there was a “moral dimension” to curbing the role of the state.

The chancellor arrived in the House of Commons armed with new official forecasts showing that Britain had bounced back from the pandemic more quickly than expected, with growth of 6.5 per cent this year and higher inflation expected to boost revenues flowing into the Treasury.

The improved forecasts gave Sunak a £35bn annual Budget “windfall” that he divided between improved public borrowing, higher spending on public services, help for people on low incomes and tax cuts in areas including business rates and alcohol duties.

He said he could do all this while setting out new fiscal rules committing him to balance the books for day-to-day spending by 2024-25, with debt projected to fall as a share of national income in that year. Sunak built in a £25bn buffer against his main ambition of eliminating the current budget deficit in 2024-25.

Underpinning what Sunak called “a new age of optimism” were Office for Budget Responsibility forecasts showing the UK economy will now settle 2 per cent below its pre-pandemic path in the medium term rather than the 3 per cent it forecast in March, implying less long-term pandemic damage.

Gilts were on course for their biggest one-day rally since March 2020 after the government slashed its planned debt sales this year by almost £60bn, a much larger cut than markets had anticipated.

As a signal of his desire to start unwinding the huge tax rises he announced this year to pay for Covid relief programmes, Sunak set out a range of measures to help struggling individuals and businesses.

Amid cross-party criticism of his decision to end a temporary £20-a-week uplift to universal credit, Sunak partly reversed that move by reducing the taper rate — the rate at which UC is withdrawn as earnings rise — from 63 per cent to 55 per cent at a cost of more than £2bn a year.

A shake-up of business rates, including 50 per cent discount for some companies, was billed as the “biggest cut to business rates in 30 years” but it fell short of the major overhaul demanded by the Labour party.

Sunak confirmed that the “bank surcharge” on profits would be slashed from 8 per cent to 3 per cent in 2023 — the same year that corporation tax rates for all businesses rise from 19 per cent to 25 per cent.

Among the areas to receive more money were education — Sunak said he was providing almost £2bn extra for schools and colleges — the courts service, skills training and local transport. All departments would receive a real-terms budget increase.

The overseas aid budget, controversially cut by £4bn by Sunak earlier in this parliament, is scheduled to be restored in 2024-25; but the chancellor confirmed a £2bn cut in proposed public spending on research and development in the last year of the parliament.

Rachel Reeves, shadow chancellor, accused Sunak of “living in a parallel universe” and said the government had failed to soften the cost of living crisis for millions of families this winter.

The OBR forecast inflation averaging 4 per cent this year, with households and businesses facing the immediate prospect of rising prices as well as soaring energy bills and supply shortages.

FT economics editor Chris Giles’ 2-minute Budget summary

UK chancellor Rishi Sunak was able to craft his third Budget, and second of 2021, in the knowledge that he was sitting on hugely improved public finance forecasts. These came from the large tax rises he has imposed earlier in the year and a better economic outlook. He chose to bank some of the windfall and use the rest to spend more on public services, shielding them from much higher inflation. Sunak made it clear that if his luck holds, he would look at cutting taxes in the run-up to the next general election, which is due to be held in 2024.

A windfall in the public finances by 2024-25

  • Improved outlook increases government receipts by £46.3bn

  • Tax rises will bring in £25.2bn

  • Public spending increases and some tax cuts will cost £43.3bn

  • Leaving £28.1bn for reduced borrowing

Key economic figures

Budget 2021: Rishi Sunak sets out ‘moral’ mission to limit state and cut taxes


Persistent hit to the economy from coronavirus


Public borrowing in 2021-22


Leeway in Sunak’s current budget balance rule for 2024-25

Sunak’s ambition is to reduce the size of the state

  • But the chancellor’s tax rises far outweigh his tax cuts

  • Tax revenues set to reach 36 per cent of national income in 2024-25

  • This compares to pre-pandemic tax burden of 32.9 per cent

  • Share of public spending as proportion of GDP set to rise by 2.5 percentage points over course of this parliament

Inflation and the cost of living


Inflation forecast to peak next spring


Disposable incomes will take two more year to recover from the pandemic


Increase in universal credit to offset a £6bn cut

Business measures

  • Business rates increase for 2022 cancelled

  • 50% discount for retail and hospitality businesses in 2022-23

  • Announces end of R&D credits for UK companies investing abroad

  • Big increase in government funding for R&D, but money will flow slower

Spending review


Real annual increase in day-to-day departmental spending


Amount of total spending gobbled up by health by 2024-25


Public sector pay rises no longer frozen

Personal finance

  • Overhaul of alcohol taxes, linking tax paid to strength of the drink

  • Universal credit withdrawal rate cut from 63 per cent to 55 per cent

  • Minimum wage for those over 23 rises to £9.50 an hour from April 2022

  • Fuel duty frozen for the 12th year in a row

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