Early evening summary
- Rishi Sunak has bowed to intense pressure by partly reversing universal credit cuts as he announced measures in the budget to deal with a squeeze on households this winter, with lower alcohol and fuel duties.
- Millions of struggling low-income households will not benefit from the £2bn “tax cut for the low paid” announced by Sunak in the budget as a way of easing the pain of soaring living costs, according to campaigners.
- Taxes on draught beer and prosecco will be slashed after the chancellor announced sweeping changes to alcohol duty that reward lower-strength drinks.
- The chancellor was handed an extra £51bn for his budget after the government’s independent forecasting unit upgraded its forecast of the economy’s recovery to a more optimistic outlook for growth this year.
- The Office for Budget Responsibility said Britain’s tax burden was heading to its highest level since the early 1950s – although Nick Macpherson, a former Treasury permanent secretary, says this may not happen in practice. Sunak’s two budgets in 2021 have now raised taxes by more than in any single year since Norman Lamont and Ken Clarke in 1993, the year of Black Wednesday.
- But yet ... the chancellor has told backbench MPs tonight that he would like to prioritise tax cuts, with City analysts suggesting he is assembling a pre-election war chest.
- Large swathes of the population face a squeeze on living standards over the coming year, the Institute for Fiscal Studies said. It warns middle earners will see their take-home pay fall over the next year, after inflation, due to rising prices and taxes. The OBR said real disposable incomes wouldn’t reach pre-pandemic levels until the second half of 2023.
- Sunak’s plans could be threatened if the economy slows and inflation picks up. The chancellor was bullish about the economy’s prospects but the OBR said growth was slowing and inflation would hit 4.4% next year. Even a mild dose of stagflation would blow the chancellor off his tax-cutting course.
- Cuts to the UK’s foreign aid budget are to remain for at least another three years, with aid spending below the statutory target of 0.7% until at least 2024-25, the Treasury has announced.
- Retailers have warned the chancellor’s decision to dodge a full review of business rates will result in an “unnecessary loss” of jobs and shops – saying the budget’s temporary 50% cut for small businesses is not enough to help the high street.
- Keir Starmer has tested positive for Covid, the Labour party has confirmed, meaning he was unable to take part in prime minister’s questions and will not be able to respond to the budget.
- Here’s our list of key points from the budget.
And here is a Guardian panel, with verdicts on the budget from Miatta Fahnbulleh, Polly Toynbee, Katy Balls, Carys Roberts and Frances O’Grady.
Thanks for reading and commenting.
Sunak tells Tory MPs in future he wants to prioritise cutting taxes
As my colleague Jessica Elgot reports, having delivered a budget at lunchtime that included not-insignificant increases in spending (at least on what was planned - see 5.37pm and 5.48pm), Rishi Sunak gave the impression when he spoke to the Conservative 1922 Committee this evening that, at heart, he would like to be prioritising tax cuts.
Sunak has gone 'from pay freeze to pay squeeze', says TUC
One union leader has attacked the budget as a “confidence trick”, while business groups were also less than enthusiastic about the chancellor’s announcements, PA Media reports. PA says:
Mick Whelan, general secretary of the train drivers’ union Aslef, said: “It’s a confidence trick, because it’s not new money - or even a new announcement - it’s just a rehash of money that has already been promised, and already allocated, dressed up to make the vhancellor look good. On the eve of Cop26, cuts to air passenger duty send out all the wrong signals.”
Kitty Ussher, chief economist at the Institute of Directors, said the crucial test was whether the budget gave business the confidence to invest, adding: “The chancellor’s business rates and R&D tax credit reforms are welcome, but with hefty hikes in other taxation on the horizon that may not be enough to convince business leaders to press go on their plans for growth.”
Tony Danker, CBI director general, said: “The chancellor has shown a genuine willingness to listen to business with measures that will get firms innovating and help the economy to grow. It takes several positive steps forward, but isn’t bold enough to deliver the high investment, high productivity economy the government seeks.
Shevaun Haviland, director general of the British Chambers of Commerce, said: “The chancellor has listened to Chambers’ long-standing calls for changes to the business rates system and this will be good news for many firms. It will provide much-needed relief for businesses across the country, giving many firms renewed confidence to invest and grow.”
TUC general secretary Frances O’Grady said: “The chancellor has gone from pay freeze to pay squeeze. Millions of key workers who saw us through the pandemic will still be worse off than they were in 2010. That puts vital services under pressure as even more staff leave, and it risks the recovery. He should have announced fair pay deals for whole industries, negotiated with unions, designed to get pay and productivity rising in every sector.”
And Unite general secretary Sharon Graham said: “The chancellor’s statement makes it clear that the government wants workers to pay for the pandemic. Their incomes are under attack from tax rises and inflation while the super-rich will continue to prosper. That is not acceptable.”
Brexit likely to be twice as damaging to economy as Covid, says OBR
Richard Hughes, chair of the OBR, also told the PM programme that the OBR now thinks Brexit will be twice as damaging to the economy as Covid. He explained:
In the long run, it’s about twice the effect of the pandemic. Our previous forecasts factored in a 4% loss of output from Brexit. We’ve now revised down our assessment of the pandemic to 2%. And so far the data we’ve seen on trade flows between ourselves and the EU broadly support that judgement that we are losing about 4% of GDP along the way, just based on that relationship between trade intensity and output.
City analysts: Sunak building a pre-election warchest?
Today’s spending review outlined £150bn of additional departmental spending over this parliament, which Rishi Sunak told MPs was “the largest increase this century”.
But despite that, some economists are suggesting that the chancellor could also be assembling a war chest to be spent before the next general election (which must take place by 2024).
That could ease the tax burden, which the OBR sees heading to the highest since the early 1950s (see 2.10pm).
Here’s Martin Beck, senior economic advisor to the EY ITEM Club:
“Despite today’s ‘giveaway’, the chancellor has been cautious. Borrowing falls below 2% of GDP from 2023-24 onwards, meaning a current budget surplus of £ £25bn or just under 1% of GDP in 2024-25.
So the most prominent of the chancellor’s new fiscal targets will be met with ample headroom. Combined with any further cuts in the OBR’s scarring estimate, the chancellor may well end up with a big pre-election war chest to spend on tax cuts or spending increases.
Neil Shearing, group chief economist at Capital Economics, says the OBR handed Rishi Sunak an early Christmas gift through its improved forecasts.
That included cutting its estimate of the economic scarring of Covid-19 from 3% of GDP to 2%. Shearing says:
The OBR handed Rishi Sunak a significant upgrade to its forecasts for the public finances but, while the chancellor spent some of the windfall a substantial amount was saved – allowing him to start building a war chest that could be deployed ahead of the next election.
He banked a significant amount of the forecasted improvement in the public finances, leaving him with £17.5bn in headroom against his new fiscal rules. What’s more, given that the OBR is still forecasting more scarring than the Bank of England (1%) and us (closer to zero) there is a good chance that the chancellor’s headroom against his new rules will increase further in future forecasting rounds. A quick back-of-the-envelope estimate taking account of the measures announced today suggests it may end up being closer to £25-30bn by 2024-25.
This would give the chancellor room to either increase spending or (perhaps more likely) cut taxes ahead of the next election. Viewed this way, it’s difficult to escape the feeling that this was a budget designed to meet political rather than economic objectives.
This is what Richard Hughes, chair of the Office for Budget Responsibility, told the PM programme a few minutes ago when he was asked to give a big picture explanation as to what the budget is doing on spending. He was asked if Rishi Sunak was spending all the extra allocated to him from better-than-expected growth figures. Not entirely, Hughes said. He went on:
Our forecasts gave the chancellor £35bn extra in receipts before he took any policy decisions in this budget, and that was a windfall from both strong growth in the medium term but also higher inflation in the near term, which gave him a bit more what we call ‘fiscal drag’ in forecasting terms.
He added to this £35bn at an extra £15bn pounds in tax rises, the ones announced back in September, which took his overall spending spending review war chest around £50bn pounds.
He spent about £30bn of that. Half of that went straight from the new health and social care levy into the health service and social care sector. And then he used the other half to essentially reverse the cuts that he had pencilled in to other departmental budgets since the start of the pandemic.
But that did leave him about £20-25bn left over after he did his spending review and he used that to reduce borrowing in every year, and in particular to meet his target to get debt falling over the medium term, which he needs to get falling by 2024-25, according to his new fiscal rules.
A 'Boris budget', or 'Brexit Blairism' – what thinktanks say about the budget
We posted the IFS’s verdict on the budget at 4.29pm. Here are assessments from three more thinktanks.
From Torsten Bell, chief executive of the Resolution Foundation, a thinktank focusing on inequality and low pay
The chancellor has today delivered a ‘Boris budget’ by spending half of the large £141bn borrowing windfall that was handed down by the Office for Budget Responsibility.
He’s used that windfall to spend significantly more, especially in the next few years. The lasting effect of that extra spending is to allow him to partially reverse some of his own decisions by reinstating cuts to aid spending, and increasing universal credit generosity for working claimants.
But the forecasts contained far less good news for household finances. Higher inflation will all but end income growth next year. The chancellor’s welcome reduction in the universal credit taper will soften, rather than tackle, the cost of living crisis facing millions of families across the UK today.
A fuller verdict from the Resolution Foundation is here.
From Ian Mulheirn, executive director for UK policy at the Tony Blair Institute
The chancellor recanted on the Conservatives’ 11-year experiment to shrink the size of the state, concluding that running public services on a shoestring is no longer compatible with winning elections.
However the £30bn exchequer cost of Brexit each year has forced the chancellor to choose between respectably-funded public services and keeping taxes low. Sadly that’s one legacy of the past 11 years that the government doesn’t yet seem willing to revisit.
The chancellor’s statement was laced with references to returning to spending levels not seen since 2010, a remarkable recantation of much of the past 11 years. Post 2010 austerity agenda embodied two beliefs. One was that getting the deficit under control was key to safeguarding the economy and the public finances. The other was that this should be achieved by cutting deep into the functions of the state. Sunak has doubled down on the first but repudiated the second.
Rishi Sunak shares George Osborne’s commitment to balancing the day-to-day budget. His new fiscal rule commits the Treasury to making sure all current spending is tax funded by 2024-25. But unlike in 2010, he has addressed the risk of overhasty withdrawal of fiscal support from a still-fragile economy, loosening the purse strings by £25bn next year compared to previous plans.
But the chancellor’s decisions on public spending were more remarkable. After a year of record tax rises, the chancellor showered more additional money of public services than anyone anticipated. And while spending in some areas will remain tight, the big picture it that this government wants to undo the failed experiment of shrinking the state, which his predecessors made the key dividing line of British politics. Sunak has concluded that running the public services on a shoestring is incompatible with winning elections.
From Ryan Shorthouse, chief executive of Bright Blue, a liberal conservative thinktank
Finally, Boris’s boosterism has defeated Treasury orthodoxy. This is a very different Conservative government to the ones in the last decade – choosing, as the chancellor proclaimed, to invest rather than retrench. Today was the definitive farewell to the age of austerity. Really, we are returning to the New Labour days – Brexit Blairism, if you like.
The Women’s Budget Group (WBG) which campaigns for a gender equal economy, accused the chancellor of “papering over the cracks” exposed by the pandemic, rather than a transformative rebuilding of the economy.
WGB director Dr Mary-Ann Stephenson welcomed some positive announcements, including the £500m promised for family hubs, but pointed out that “75 new hubs won’t fill the void left by the closure of more than 1000 children’s centres between 2009 and 2018/19”.
In too many areas, she said the spending did not come close to making up for the cuts of the last 10 years, let alone the impact of the pandemic, particularly on women. She said:
The budget speech devoted more time and detail to alcohol duty than to policies on care, housing, climate and violence against women, all of which are more important to women than saving a few pence on a bottle of prosecco.
She said it was a hugely disappointing budget for the childcare sector which has been starved of cash for year. “In 2019-20 the free hours [of childcare] were underfunded by £662m, the additional £170m funding [promised by the chancellor] doesn’t even make up for that, let alone cover the increased costs of the national living wage.”
Stephenson also criticised the fact that the chancellor made only passing mention of the epidemic of violence against women and girls. “The £185m for support services for victims/survivors falls far short of the £409m that Women’s Aid estimates is needed for domestic violence and abuse alone,” she said.
Rishi Sunak’s budget made almost no mention of universities – to the relief of many of the sector’s leaders after months of speculation about radical changes to their funding in England.
Higher education was notable mainly by its absence in the budget, other than a recast commitment to the government’s 2.4% of GDP target for research and development spending, and delaying the time taken for reaching the £22bn target until 2026-27.
But the government had for months signalled that it was preparing a response to the Augar review on post-school tertiary education funding, and Sunak’s spending review had been expected to tackle forecasts for rising student loan write-offs. Tuition fee cuts, faster loan repayments or student number limits were all being mooted within Whitehall.
Nick Hillman, director of the Higher Education Policy Institute,observed:
We still don’t know what, if anything, will happen to student loans or student numbers or tuition fees. This is surprising because, given major changes can take a couple of years to introduce, we will soon approach the point where it is not feasible to roll out really big new changes smoothly before the next election.
On further education there was an £1.6bn increase in spending, including for the new T-level vocational courses for post-16 education. But the increase only means that overall funding will keep pace with the rising numbers of 16- to 19-year-olds in England’s population.
Sunak also announced £560m to fund a new adult numeracy programme, Multiply, which aims to improve basic maths skills. The fund will open next year, offering classes and online courses for adults without a pass grade in GCSE maths.
OBR says freeports unlikely to boost economic activity overall
The government argues that one of the advantages of Brexit is that it gives the UK the ability to set up freeports, with tax freedoms that go beyond would have been allowed under the EU. But in its report today (pdf) the Office for Budget Responsibility says freeports will cost £50m a year from 2022-23 onwards and that they will not boost the economy overall. It says:
Given historical and international evidence, we have assumed that the main effect of the freeports will be to alter the location rather than the volume of economic activity, so the costs have been estimated on the basis of activity being displaced from elsewhere.
To be fair, that does not make the policy wrong. When he was the PM’s chief adviser, Dominic Cummings was reportedly in a meeting where officials told him that freeports would not generate new jobs, but just move them from one part of the country to another. That was the whole point, he is said to have replied.
The UK’s cost of borrowing has fallen today, in a post budget statement boost to the chancellor.
The yield, or interest rate, on Britain’s benchmark 10-year gilts has dropped from 1.11% on Tuesday to below 0.98% today.
That’s the biggest one-day move since March 2020, when nervous investors were seeking the safety of government debt. Earlier this month, it hit 1.2% for the first time since May 2019, amid speculation that the Bank of England was preparing to raise interest rates next month.
Long-term borrowing costs have also fallen sharply, as measured by the yield on 30-year government bonds.
Bond yields fall when prices rise, and bond traders are reacting to the news that Britain won’t be borrowing as much as previously forecast.
The Debt Management Office, which handles bond issuances, said it plans to issue £194.8bn of gilts in the current financial year, a drop of £57.8bn [that’s to cover maturing bonds as well as new borrowing].
Matthew Bennett, investment manager at NFU Mutual, explains:
“The improved economic forecasts combined with relative few spending pledges means less government debt will be issued next year than previously forecast and markets reacted to this change in supply dynamics.
“However, this move could easily reverse over the coming weeks and months depending on policy decisions from the Bank of England, global economic developments and the stickiness or otherwise of inflationary forces.”
Budget fails to address NHS staffing shortages, health leaders claim
The record high NHS waiting list in England will “continue to grow” because the budget failed to address the workforce crisis, health leaders have warned.
Rishi Sunak said he was announcing a £5.9bn package of NHS capital funding to help tackle the enormous backlog, which now stands at 5.7 million patients.
The chancellor pledged to deliver 30% more elective activity by 2024-25 compared to pre-pandemic levels. This is equivalent to millions more checks, scans and procedures for non-emergency patients, he said. The funding will be used to set up 100 “one-stop-shop” community diagnostic centres across England and upgrade 70 hospitals.
But NHS chiefs and health leaders cautioned that the funding would effectively be pointless without the urgent recruitment of thousands more staff to diagnose and treat the millions of patients waiting for care. The health service currently has about 100,000 vacancies.
Dr Andrew Goddard, president of the Royal College of Physicians, said he welcomed the “much needed” investment in diagnostic facilities. He went on:
But it’s no good having new equipment if there aren’t enough skilled staff to make use of it. The size of the NHS workforce is one of the biggest limiting factors on our ability to get services back on track. To make the most of this new funding we need enough staff to conduct tests and deliver treatment, which is why we’re disappointed that the government didn’t take the opportunity to significantly increase the number of medical school places.
Pat Cullen, general secretary of the Royal College of Nursing, added:
Any new centre or clinic requires skilled staff, as does the backlog of people needing care and support. Announcements on new hospitals and clinics raise patient expectations but without investment in the nursing workforce waiting lists will continue to grow.
Saffron Cordery, the deputy chief executive of NHS Providers, which represents NHS trusts, said NHS chiefs were “disappointed and frustrated” that there was no increase in Health Education England’s NHS education and training budget. She went on:
Workforce shortages and the resulting unsustainable workload on existing NHS staff are currently the health service’s biggest problem. They can only be tackled with a robust long term workforce plan and increased longer term investment in workforce expansion, education and training, none of which are currently in place.
Aid agencies are angry and disappointed that the UK won’t restore its overseas aid budget to 0.7% of GDP until the end of the parliament.
Amy Dodd of The One Campaign to end extreme global poverty said the Chancellor should have acted to restore the 0.7% target immediately, having cut it to 0.5% last year.
Dodd also expressed concern that the “lack of clarity” in today’s statement could mean the Treasury was planning to further dilute the UK’s commitment to development aid by using it to fund things such as Covid vaccines, which were not in the original target.
“This lack of clarity given is disappointing and strengthens concerns that the Chancellor is using accounting trickery to make further cuts.
Having already shrunk the UK’s support for development, implementing further cuts by stealth would exacerbate the challenges of climate and Covid already faced by developing countries.
“If Government is serious about tackling global challenges, as it should be on the eve of G20 and Cop26, it should commit to returning to 0.7% now, as the UK economy bounces back to pre-Covid levels and when it is most critically needed.”
Bernard Aryeetey, Global International Affairs Director of WaterAid, said millions of the world’s poorest people will continue to miss out on clean water, decent toilets and good hygiene until the target is restored.
“We estimate that 10 million people will miss out every year until the budget is restored.
The Chancellor’s delay on restoration means three more years of dirty water, further infant mortality and the wider spread of disease for millions in vulnerable communities.
Nick Dearden of the Global Justice Now campaign said locking in aid cuts for a further three years will have “a devastating impact, costing countless lives in the global south - and that should weigh on Rishi Sunak’s conscience.”
Stephanie Draper, of the Bond network for UK organisations working in development, said the Chancellor was again “balancing the books on the backs of the poorest” while undermining trust in the UK.
“This makes the UK’s standing in addressing global inequality even more questionable, whilst severely undermining crucial Cop26 negotiations.”
Boris Johnson and Rishi Sunak have been visiting a brewery to promote their changes to alcohol taxes. Whether or not they were able to organise a piss-up on the premises does not seem to have been resolved, but they can certainly stage a photo oppotunity.
Although the government is promoting the alcohol duty reforms as a big feature of the budget, in fiscal terms they are insignificant. According to the budget red book, in 2022-23 the alcohol measures will cost the Treasury £565m - although £545m of that is the cost of the alcohol duty freeze, and duty reform is only costing £20m (which means it is not really a net giveaway at all). Even by 2026-27, the alcohol duty reform is only due to cost the Treasury £155m.
The arts sector has cautiously welcomed the budget but many key figures stressed further support was needed.
Sharon Heal, the director of the Museums Association, said the package of support for museums recognised the difficulties that the pandemic was still causing.
In particular, we are pleased to see the government recommit to funding for the renovation of regional museums in England. However, it should be noted that the government originally committed to £100m of spending on the Ment programme in 2019, but delivered only £19m of this fund due to the pandemic.
Heal said she was also pleased the government had agreed to extend the museums and galleries exhibitions tax relief and to double its value. “However, we continue to believe that this relief should be made permanent on the same basis as other cultural sector tax reliefs, such as film and theatre.”
The Society of London Theatre & UK Theatre’s chief executive, Julian Bird, said the increase in rates of tax relief from 45% and 50% (for touring productions) “will provide producers and investors with greater confidence in developing our world-leading theatre and drive the cultural recovery from the pandemic”.
But Paul W Fleming, the general secretary of Equity (the trade union for performing arts workers), said the budget “continued the government’s tradition of giving a bung to the bosses and offering little to the workers”. He went on:
Additional money for cultural institutions and a temporary tax relief increase for theatres are necessary. However, creative workers who underpin our renowned industry face a triple whammy of tax increases, rising energy bills and an inadequate social security system for the self-employed, making it even harder for those from working class backgrounds to break into the industry.
IFS: large swathes of population face living standards squeeze
Large swathes of the population face a squeeze on living standards over the coming year, the Institute for Fiscal Studies warns.
In its initial response to today’s budget, the IFS warns that middle earners will see their take-home pay fall over the next year in real terms, due to rising prices and taxes.
Wage rises will be largely eroded by inflation, plus workers face higher national insurance payments via the health and social care levy, and the freeze on income tax thresholds announced in March’s budget.
The IFS says:
Rises in national insurance contributions and (through a freeze to the personal allowance) income tax in April will come on top of rising inflation, taking a significant swipe at people’s spending power.
According to the new forecasts, over the next year a median earner will find their pre-tax pay just about outpaces inflation, but after the extra income tax and NICs due their take-home pay will fall by about 1%, or £180 per year, in real terms.
Many lower earners will see increases in income, though inflation and tax rises will tend to make those increases much more modest than headlines might suggest. Before tax, about half of the 6.6% increase in the minimum wage will be eaten up by inflation over the next year, meaning a real-terms rise of about 3.2%. After tax this will become a 1.2% real increase in take-home pay for a full-time minimum wage worker.
Perhaps the biggest news from today is that those with the strongest prospects for income growth as we (hopefully) emerge from the epidemic are households with someone in paid work but with a low enough income to be on universal credit. These households will keep significantly more of their benefits as a result of today’s announcements. The gains will be especially large for those who also stand to benefit from the increases to the minimum wage. A full-time minimum wage worker who is also on universal credit will have their disposable income increase by around £250 per year as a result of next April’s increase in the minimum wage, and an additional £1,000 per year or more (depending on precise circumstances) as a result of the increases in universal credit announced today.
One “bigger-picture takeaway” is that the minimum wage and benefits will now be working together to provide relief to living standards for lower earners, the IFS adds.
This marks a reversal on recent years when they have been in a tug-of-war, and sometimes (erroneously) presented as substitutes for each other – another way in which the Sunak and Osborne chancellorships are starkly contrasting.
But those out of work face a tough winter.
A group who are likely to find the coming months especially tough are households without someone in paid work. Prices are set to continue rising relatively quickly over the winter while their benefits stay the same, and while many will still be adjusting to the removal of the temporary £20 per week benefit uplift. Ultimately, real income levels for those out of work are set to return to something similar to pre-pandemic – but the road there will not be smooth, as their spending power is set to be eroded by inflation before benefit rates ‘catch up’ in April 2022 and April 2023.
And all of this comes in a context where the out-of-work safety net is substantially lower than a few years ago as a result of retrenchment pre-pandemic.
The Institute for Fiscal Studies d0irector, Paul Johnson, also explains how Rishi Sunak has used the biggest tax increases since John Major government in 1993 to fund spending increases:
“The government is now planning to spend more on public services, and to have a more generous system of universal credit, than it was intending pre-pandemic. The increases in universal credit for those in paid work are occurring alongside increases in the national living wage. This means that the budget and spending review are much more similar to Gordon Brown’s than to George Osborne’s. To help fund the spending increases, the chancellor confirmed big tax rises: this year has seen the biggest set of tax-raising measures since 1993. It now looks like a large part of those tax rises is to be spent rather than being entirely used to reduce borrowing as originally announced.
If implemented, this might be sufficient to push borrowing below that expected prior to the pandemic and to see debt falling as a share of national income. Of course there is huge uncertainty over the outlook for the economy and it remains to be seen whether the tax rises will actually be implemented as announced.
The coming year will also be a difficult one for living standards. For example, for middle earners rising inflation and tax rises mean their real take-home pay is set to fall by around 1%.”
Nick Macpherson, a former Treasury permanent secretary, says he thinks that in practice taxes will never rise as much as his old department is predicting.
The Treasury has distributed to journalists showing what difference the changes to alcohol duty will make to particular drinks. Here it is, although you may need to magnify the screen to read it properly.
Drinkers of port (up £1.09) and madeira (up 86p) seem to be the biggest losers, although the decision to tax stronger drinks more also means red wine seems to be going up in price and white wine down. Prosecco should get noticeably cheaper (by 87p a bottle), but fruit ciders will go down in price too (by 13p a pint in the pub).
UK faces stagnation in household disposable incomes
Despite Boris Johnson’s claim that he’s building a high-wage economy, household incomes will barely grow next year once you’ve accounted for inflation.
Rising taxes and the cut in universal credit payments will also take a bite, alongside the impact of higher prices in the shops and the jump in energy bills.
The Office for Budget Responsibility predicts that real household disposable incomes (ie, after inflation), will rise by just 1.1% this year, and a paltry 0.3% in 2022, after shrinking by 0.6% last year.
And on a per person basis, real household disposable incomes only return to pre-pandemic levels in the latter half of 2023, with growth of 1.5% that year.
Thats’s despite nominal household disposable incomes seen growing by 4.0% in both 2021 and 2022.
OBR chief Richard Hughes told journalists that while there is a recovery in nominal wages over the next few years, that is countered by above target inflation, taxes going up, and a net reduction in universal credit compared to what households had before.
The net effect of that is that real household disposable income per capita is not actually recovering to its pre-pandemic level until the second half of 2023.
So you’re seeing a stagnation in household disposable incomes over the next few years.
Most of that is inflation. Some of it is tax and benefits, but the lion’s share is the fact that inflation is eating away at nominal wages over the next few years.
There’s a smaller effect from the NICs [national insurance] rise as well as the fall away in UC.
The IFS says these forecasts are ‘very disappointing’:
And if inflation does rise higher than forecast, that would intensify the cost of living squeeze:
Richest families gained most in cash terms from furlough, Treasury figures show
The Treasury has published a distributional impact assessment (pdf), covering the impact of tax and spending decisions taken since 2019.
It shows that, in cash terms, the wealthiest households gained most from Covid support schemes, particularly furlough.
On the basis of support as a proportion of household income, the poorest households gained most. But that was because of the impact of the universal credit cut. Just looking at the two job support schemes (furlough, and the scheme for the self-employed), they had a broadly similar impact on all households.
This is how the document explains the figures.
Charts 1.D and 1.E illustrate our estimates for the gross support that working-age households of different income levels received on average from the main government Covid-19 support schemes. They show that the poorest households were supported most relative to their overall income levels. Cash support is somewhat higher in higher-income deciles because both CJRS [Covid job retention scheme] and SEISS [self-employment income support scheme] grants were allocated as a proportion of earnings (or gross profits for the self-employed), and higher-income households are more likely to have at least one higher earner, who would consequently receive a larger grant.
Opposition MPs and campaigners have said that the £2bn reduction in the universal credit taper rate will provide no extra support for 4 million people who are unemployed or unable to work because of disability or illness, and amounts to just a third of the £6bn a year spent on the universal credit uplift.
Katie Schmuecker, deputy director of policy at the Joseph Rowntree Foundation, said:
The reality is that millions of people who are unable to work or looking for work will not benefit from these changes. The chancellor’s decision to ignore them today as the cost of living rises risks deepening poverty among this group, who now have the lowest main rate of out-of-work support in real terms since around 1990.
There is much amusement/bemusement in the north-east to see that the Teesside market town of Yarm is receiving money from the government’s levelling up fund - a share of £100m earmarked for five projects in the region. It’s already the poshest town in the Tees Valley, complete with an artisan butcher, loads of independent shops, a tapas bar, steak house and so forth. Surely no coincidence that it is also home to every Tory’s favourite mayor, Ben Houchen.
A leading race equality chief has welcomed extra spending on family hubs and parenting programmes, but warned that support for working families is a “drop in the ocean” and criticised the government for showing a lack of ambition.
Responding to today’s spending review, Jabeer Butt, CEO of the Race Equality Foundation, said:
We wanted to see today’s budget investing in people over places and building back fairer for those communities that have been so badly hit by the many effects of the pandemic. Covid has had a disproportionately damaging impact on black, Asian and minority ethnic families and children, so cash for family hubs and parenting programmes in today’s budget is welcome.
But the scale of support is too small. It reveals a lack of ambition on the government’s part when it comes to making a meaningful positive impact on these families’ lives.
There has been an underwhelmed reaction from the organisations representing barristers to the increased funding for the Ministry of Justice. While Rishi Sunak is attracting some ridicule for boasting that the education budget has been restored in real terms to 2010 levels, the legal profession can only dream of that, given that the MoJ had its budget cut by over a quarter over the last decade.
While, like all departments the MoJ, got a real terms increase, it is a far cry from the extra £2.48bn a year the Bar Council said was needed just to return the justice system (excluding police funding) to the levels of 2010.
There is £477m to tackle the backlog in the criminal courts but the budget report admits this will only reduce crown court backlogs from 60,000 today down to 53,000.
Derek Sweeting QC, chair of the Bar Council, said:
The announcement by the chancellor today is a step in the right direction but there will still be a shortfall of funding to tackle the justice crisis, restore public confidence and reduce the backlogs in our courts and tribunals. Moving forward the Bar Council will be engaging with the profession, courts service and Ministry of Justice to rebuild our justice system.
Jo Sidhu QC, chair of the Criminal Bar Association, said the extra money was “window redressing” in the absence of cash to pay properly for criminal advocates who are being driven out of the profession and invest substantial amounts in legal aid and addressing the backlog. He said:
There is little sense putting aside headline-grabbing sums on important initiatives to tackle rape and violence against women, or repeating a commitment to the largest capital spend on prisons in a generation, when there is only short-term funding for the middle-end, the engine room of the system, the court process and once again under-funding to pay for the publicly funded lawyers whose role is fundamental to whether or not prison becomes a relevant consideration ...
This budget once again exposes a lack of joined up thinking and concomitant funding end-to-end across the criminal justice system without which a core government duty will continue to fail - that a state should do its utmost to protect all its citizens from harm and that includes complainants, defendants and witnesses be they men, women or children.
The early years sector was decidedly underwhelmed by the chancellor’s announcements, with one pointing out that he spent more time on the details surrounding alcohol duty than on childcare.
In addition to the £18m for family hubs and £20m for parenting support trailed in advance, the chancellor announced a £170m increase by 2024/5 in the hourly rate paid to early years providers for the government’s free childcare offers.
Neil Leitch, CEO of the Early Years Alliance said while any increase in funding was welcome, the fresh commitment was not enough to safeguard the future of the sector. He said:
With huge rises in national living and minimum wages set to come into effect next April, alongside increases in national insurance contributions, the cost of delivering early years places is set to soar, and the harsh reality is that the investment announced today - likely to amount to little more than a few pennies extra per hour for early years providers - won’t come close to covering this.
Viewed from the north of England, a big omission from Rishi Sunak’s budget was any commitment to fund the two most symbolic (and expensive) infrastructure projects in the north of England: Northern Powerhouse Rail and HS2 phase b.
The former is a new rail line from Liverpool to Hull via Bradford and the second is supposed to whizz rail passengers on two new spurs from Birmingham to Manchester and Leeds. At the moment, HS2 is only guaranteed to go from London to Brum.
All Sunak said today was that the Integrated Rail Plan (IRP), which will presumably decide whether to recommend the new lines, would be published “soon”.
Henri Murison, director of the Northern Powerhouse Partnership, a thinktank set up by George Osborne when he left government, said:
There is still a huge hole in the government’s plans for levelling up with no clear commitment to either HS2 or a new Northern Powerhouse Rail line through Bradford in today’s speech. Until the IRP is published, uncertainty will continue to undermine business confidence and put a dampener on attracting investment to the north of England.
And Marcus Johns, a fellow at IPPR North, another thinktank, said:
The absence of the levelling up white paper and integrated rail plan by this budget mean that there is still no strategy, framework, or leadership behind levelling up funding promises and little clarity is available for the north’s mayors and local leaders for their ambitions after the pandemic.
Rishi Sunak has left himself limited headroom to hit his four new fiscal rules, compared with previous chancellors George Osborne and Philip Hammond.
That means that slightly lower GDP growth, or slightly higher spending, would wipe out this headroom, and the OBR warns that it’s already looking tight.....
Combined with news about inflation and energy prices since we closed the forecast, we estimate that the Chancellor’s headroom has already been reduced by £1.9bn.
The full text of Rishi Sunak’s budget speech is now on the Treasury’s website, here.
Rachel Reeves says working people paying 'more for less' under Tory budget plans
The leader of the opposition normally responds to budget statements, but Sir Keir Starmer had to stay away because he has tested positive for Covid, and so Rachel Reeves, the shadow chancellor, replied to Rishi Sunak instead. She made a good impression.
Here are some extracts from her speech.
- Reeves said under the Tories working people were paying more for less. She said:
Working people are being asked to pay more for less, for three simple reasons: economic mismanagement, an unfair tax system, and wasteful spending.
Each of these problems is down to 11 years of Conservative failure. They shake their heads, but the cuts to our public services have cut them to the bone.
And while the chancellor and prime minister like to pretend that they’re different, this budget today will only make things worse.
- She accused the government of wasting money on “cronyism and vanity projects”. She went on:
We’ve had £37bn for a test and trace system that the spending watchdog says treats taxpayers like an ATM cash machine, a yacht for ministers, a fancy paint job for the prime minister’s plane, and a TV studio for Conservative party broadcasts which seems to have morphed into the world’s most expensive home cinema.
- She said the minimum wage should have gone up to at least £10 an hour.
- She welcomed the lowering of the universal credit taper, but said that working people “still face a higher marginal tax rate than the prime minister” and “those unable to work through no fault of their own still face losing £1,000 a year”.
- She said the government was raising taxes on the wrong people. She said:
The highest sustained tax burden in peace time. And who is going to pay for it? It is not international giants like Amazon, no, the chancellor has found a tax deduction for them.
It is not property speculators, they already pocketed a stamp duty cut and it is clearly not the banks, even though bankers’ bonuses are set to reach a record high this year. Instead, the chancellor is loading the burden on working people. A national insurance tax rise on working people, a council tax hike on working people, and no support today for working people with VAT on their gas and electricity bills.
- She said over the past decade the economy had grown by 1.8% a year on average. Under Labour it grew by 2.3% a year, she said. She went on:
The Conservatives are now the party of high taxation because the Conservatives are the party of low growth.
OBR: inflation could peak at nearly 5% next year.
The OBR warns that inflation could rise even higher than the 4.4% it forecasts today.
The fiscal watchdog points out that inflationary pressures have kept building since it closed its forecasts; it thinks inflation could actually peak at nearly 5% next year.
We expect CPI inflation to reach 4.4% next year, with the risks around that tilted to the upside. News since we closed our forecast would be consistent with inflation peaking at close to 5% next year.
It expects inflation to fall back relatively quickly as utility prices stabilise and supply bottlenecks. But that judgment may prove too optimistic.
So the OBR has also drawn up two hypothetical scenarios in which inflation drives even higher – an energy price shock which forces firms to lift prices; and a “mild wage-price spiral” in which earnings accelerate faster than expected.
In these two hypothetical scenarios, the OBR believes inflation could hit 5.4%, its highest in about 30 years, prompting the Bank of England to hike interest rates to 3.5% (from just 0.1% today).
The OBR says:
In both scenarios, a further sharp and persistent increase in costs means inflation peaks at 5.4% (1 percentage point above our central forecast and the highest rate in three decades) and then falls back more slowly than in our central forecast.
Based on a simple monetary policy rule, Bank Rate in our scenario reaches 3.5% (its highest since November 2008), thereby suppressing demand and moderating inflationary pressures, but even so it still takes a year longer for inflation to return to the target than in our central forecast.
At its peak, the impact of this vigorous monetary tightening prevents a further 2 to 3 percentage point rise in inflation, and without it the price level would be some 6-8% higher at the scenario horizon.
OBR: Brexit on course to cut trade with EU by 15%, leading to 4% drop in productivity
As Paul Johnson, the director of the Institute for Fiscal Studies thinktank, points out, the OBR says the latest trade figures are consistent with its forecast that in the long run Brexit will cut productivity by 4%.
Here is an extract the passage in the OBR report (pdf) on this topic. It starts on page 58.
Since our first post-EU referendum [report] in November 2016, our forecasts have assumed that total UK imports and exports will eventually both be 15% lower than had we stayed in the EU. This reduction in trade intensity drives the 4% reduction in long-run potential productivity we assume will eventually result from our departure from the EU ...
UK-EU goods trade volumes fell sharply after the TCA came into effect, and remain below their pre-Brexit (and pre-pandemic) levels in 2019. Chart E shows that UK goods exports to the EU fell by 45% in January of this year (greater than their fall early in the pandemic) and in August were still down around 15% on the level before the transition period ended. UK goods imports from the EU also fell by over 30% at the start of the year and were still down around 20% in August compared to December 2020. While goods trade with the rest of the world experienced similarly sharp falls at the start of the pandemic, in August it had recovered to 7% below average 2019 levels whereas total goods trade with the EU remained down 15%.
The OBR says it is too early to be sure that the impact of Brexit will be, but that “the evidence so far suggests that both import and export intensity have been reduced by Brexit, with developments still consistent with our initial assumption of a 15% reduction in each”.
OBR: Brexit has exacerbated supply bottlenecks:
The OBR warns that Brexit has magnified the impact of global supply chain disruption on the UK economy.
The fiscal watchdog says the successful vaccine rollout has allowed the economy to reopen largely on schedule, before cautioning:
But the strength of the rebound in demand in the UK and internationally has led it to bump up against supply constraints in several markets.
In the UK, these supply bottlenecks have been exacerbated by changes in the migration and trading regimes following Brexit.
Energy prices have soared, labour shortages have emerged in some occupations, and there have been blockages in some supply chains. These can be expected to hold back output growth in the coming quarters, while raising prices and putting pressure on wages.
Taking his March and October budgets together, the chancellor has raised taxes by more this year than in any single year since Norman Lamont and Ken Clarke’s two 1993 budgets in the aftermath of Black Wednesday, the OBR reports.
OBR: Tax burden highest since Clement Attlee in the 1950s
The Office for Budget Responsibility’s verdict on the budget is out.
And the fiscal watchdog explains that Rishi Sunak has announced a significant discretionary increase in both the tax burden and the size of the post-pandemic state.
The tax burden is set to rise from 33.5% of GDP recorded before the pandemic in 2019-20 to 36.2% of GDP by 2026-27.
That’s the highest level since late in Clement Attlee’s postwar Labour government in the early 1950s, the OBR says, when the economy was struggling after the economic shock of the second world war.
Its driven by the rise in corporation tax and the freeze in personal allowances announced in March’s budget, and the 1.25% health and social care levy announced in September.
In an assessment titled “Rebounding economy and tax rises fund larger post-pandemic state”, the OBR also confirms that Sunak is on track to hit his fiscal rules (although only by a ‘small margin’.
A rebounding economy has provided the chancellor with a budget windfall that he has added to with tax rises that lift the tax burden to its highest since the early 1950s.
He has used these revenues to fund a large increase in public spending, while reducing the budget deficit to pre-pandemic levels, and meeting his new fiscal mandate to get underlying debt falling three years from now, but only by a small margin.
The chancellor has also used around half of the improved underlying picture and increase in tax revenues to “permanently increase the size of the post-pandemic state”, the OBR adds:
Public spending falls back sharply from its peacetime high of 53.1% of GDP in 2020-21 to 45.1% this year and to 42.1% next year as pandemic-related support comes to end.
However, spending stabilises at 41.6% of GDP from 2024-25 onwards, 0.9% of GDP higher than in our March 2020 forecast, and the highest sustained level since the late 1970s.
All the Treasury’s budget documents are now available here, on its website.
And here is the Office for Budget Responsibility report (pdf) published alongside the budget.
Sunak's budget statement – snap political verdict
Anyone hoping for a budget speech that would determine, once and for all, whether the government is being driven by Thatcherite fiscal Conservatives or by high-spending, blue Labour Keynesians will probably be none the wiser. Often in a speech there is a passage where a politician appears to reveal his or her inner core self. It is the bit they seem to care about most, and for Sunak it came towards the end, when he spoke about his desire to ratchet down government spending. (See 1.35pm.) It was a passage that seemed crafted to appeal to his party, but it also sounded particularly sincere; Sunak, remember, is the chancellor who told the Tory conference that he considered excessive borrowing “immoral”. But these paragraphs had little connection with the first half of the speech, which was stuffed with boasts about government spending, and it came just before Sunak announced a £2bn increase in welfare spending.
That said, ideological inconsistency has never been a huge handicap in politics, and the UC taper announcement will be welcome. It goes beyond what was expected, and it amounts to a one-third U-turn on the UC cut (which was worth £6bn). The other major surprise in the speech came with the overhaul of alcohol duty. This seemed to go down well too, although one suspects it won’t surprise a small print assessment so easily.
As ever, it will all become clearer over the coming hours and days, as we get more time to look at the detail.
Shares in UK pub chains have jumped, after Rishi Sunak announced “draught relief” - a new, lower rate of duty on draught beer and cider.
JD Wetherspoons are up 5.5%, the top riser on the FTSE 250 index of medium-sized firms, while Mitchells & Butlers (which owns the All Bar One and Toby Carvery chains) have gained 4%%.
Pubs had been struggling under the impact of rising costs and supply chain problems, so this cut could help them (although Wetherspoons did already announce it’s cutting some prices to 99p/pint this morning)
Sunak ended his statement by saying this was a budget with a pay rise for 2 million people and a £2bn tax cut for the lowest paid.
Sunak says cut to taper rate will boost spending on universal credit claimants by £2bn
Sunak says he wants to have a country where work pay.
The universal credit taper rate is a tax on work, he says.
He says bodies like the TUC, the Joseph Rowntree Foundation and the Resolution have said it should be cut.
He says it will be cut by eight percentage points - from 63% to 55%.
He says this will be worth £2bn.
Changes like this normally take place next April.
But this one will be introduced within weeks, he says.
He says a single mother of two renting, and working full time on the national living wage, will be better off by around £1,200.
Sunak says there should be limits to what government must do
Sunak says last year state spending rose to half of GDP.
He says he did not like that, but it was inevitable because of Covid. He goes on
But now we have a choice. Do we want to live in a country where the response to every question is: ‘What is the government going to do about it?’ Where every time prices rise, every time a company gets in trouble, every time some new challenge emerges, the answer is always: ‘The taxpayer must pay’?
Or do we choose to recognise that government has limits, government should have limits?
If this seems if this seems a controversial statement to make, then I’m all the more glad for saying it because that means it needed saying.
Britain’s banks may be lifting a glass to the chancellor, even at the old duty rates.
Lowering the bank surcharge, levied on their profits, from 8% to 3% from April 2023 (see 13.19pm) will cushion the City from the impact of the rise in corporation tax.
It should help bolster London’s competitiveness as a global financial centre after Brexit.
Sunak confirms that planned rise in fuel duty will be cancelled.
Sunak says duty on sparkling wines to be cut as part of major reform of alcohol taxes
Sunak says he is announcing major changes to the way drinking is taxed. Current alcohol duties, first introduced to pay for the English civil war, are a mess, he says.
He says the main duty rates are being cut, from 15% to six. The new system will be based on the principle the higher the alcohol content, the higher the rate.
There will be lower rates for craft producers, he says.
He says he is cutting the duty premium on sparkling wines. He says drinks like prosecco are no longer just the preserve of the wealthy.
The duty for drinks made by fruits, like cider, will be cut, he says.
There will also be a lower rate of duty on draft drinks, he says.
And the planned increase on duty on spirits will be cancelled.
Sunak says he is able to make these changes because the UK has left the EU.
Here are the key points of today’s business rates changes:
Sunak announces measures to cut business rates by £7bn
In a dig at Labour, Sunak says getting rid of business rates would be irresponsible because they raise £25bn.
But to make them fairer, there will be revaluations every three years. And a new investment relief will encourage investment in technologies like solar panels.
He says the planned increase in the multiplier will be cancelled.
And he says there will be a one-year 50% cut for the hospitality and leisure sector.
He says the measures in total will cut business rates by £7bn.
Green MP Caroline Lucas says the ‘shameful’ cut to UK aid spending should be reversed now, not by the end of this parliament (see 12.51pm).
Sunak confirms that corporation tax is going up.
The £1m annual investment allowance will be extended to March 2023, instead of ending in December.
But the bank surcharge will be cut, he confirms.
Sunak increases air passenger duty for ultra long haul flights but cuts tax for domestic flights
Sunak says in 2001 the UK had to remove its air passenger duty exemption for return leg flights on domestic flights.
From April 2023 there will be a lower rate of air passenger duty for domestic flights, he says. He says 9m passengers will see a cut.
Regional airports will benefit, he says.
But from April 2023 there will be an increased air passenger duty for ultra long haul flights, he says. He says fewer than 5% of passengers will pay more.
Sunak says the UK now has the freedom, ouside the EU, to deliver a simpler, fairer tax system.
He starts with what he says is a small tax but an important one - the tonnage tax for shipping.
In the EU ships had to fly the flag of an EU state. Now the tonnage tax will reward companies for adopting the UK flag, the red ensign.
He says he is sure Labour will be delighted “that red flags are still flying somewhere in this country - even if they are all at sea”.
That is the first joke of the speech.
Sunak says providing a world class education is also crucial. That leads to higher productivity, and higher wages.
Skills spending over this parliament is increasing by £3.8bn, or 42%, he says.
But millions of adults have numeracy skills lower than those expected from a nine-year-old.
This costs people up to £1,600 a year.
He says a new scheme, Multiply, will address this, changing lives across the UK.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, suspects the chancellor is teeing up some pre-election sweeteners in the future....judging by today’s borrowing forecasts.
Sunak says the R&D tax relief rules will change.
The scope will be expanded to cover cloud computing and data.
But the current system subsisies R&D happening outside the UK. That is not fair, and inconsistent with what is happening in other countries.
From April 2023 the relief will have to subsidise investment at home, he says.
Sunak says a £1.4bn British investment fund is being set up to promote inward investment.
And a new scale-up visa will make it easier for firms to hire talented people from around the world.
By revising down its estimate of the long-term scarring caused by the pandemic, from 3% to 2% of GDP, the OBR are signalling that Covid-19 will cause less permanent damage to the economy.
That should give the chancellor more fiscal room for manoeuvre.
But, that’s still above the Bank of England’s recent estimate of 1%.
It should still mean higher tax revenues and lower borrowing requirements, as shown by the new estimates for public sector net borrowing as a share of the economy:
- 2021–22: 7.9% of GDP, down from 10.3% of GDP in March’s Economic and fiscal outlook
- 2022-23: 3.3% of GDP, down from 4.5% of GDP in March
- 2023-24: 2.4% of GDP, down from 3.5% of GDP in March
- 2024-25: 1.7% of GDP. compared with 2.9% of GDP in March
- 2025-26: 1.7% of GDP, compared with 2.8% of GDP in March
- 2026-27: 1.5% of GDP
Sunak says the government will invest more in innovation.
The UK has four of the world’s top 20 universities, he says.
By the end of this parliament spending on R&D will be £20bn a year. That is a 50% increase. And it is in addition to the R&D tax relief, he says.
That will take R&D spending to 1.1% of GDP, he says. The OECD average is just 0.7%, he says. For Germany the figure is 0.9%, for France 1%, and for the US 0.7%
Sunak says, if the government wants growth, it must tackle the country’s uneven economic geography.
There is a choice - retrench or invest. This government will invest, he says.
He says infrastracture drives productivity and levels up.
He summarises the transport spending announcements that were briefed at the weekend.
Sunak says what matters is not what is spent, but what is delivered.
Sunak says the devolved governments are also getting record settlements.
Sunak says museums and cultural attracting are getting £800m.
And the tax relief for museums and galleries, that was due to end in March next year, will be extended for another two years, he says.
Sunak is now running through a list of places that will benefit from the levelling up fund. The first round of successful bids to the fund, worth £1.7bn, are being announced today, he says.
Sunak says the government is spending more than £200m on holiday activities and food for school pupils.
And there will be an extra £2bn to help pupils recover from Covid, taking the total education recovery fund to almost £5bn.
As pre-briefed, Sunak announces more funding for families.
Sunak says health spending will increase by £44bn, to over £177bn.
Social care will get the biggest increase in its budget for over a decade, he says.
Investment in housing will total nearly £24bn, he says.
And a levy on developers with profits of more than £25m, worth 4%, will help fund a £5bn fund to remove unsafe cladding.
UK growth forecasts in full
Today’s growth forecasts show a significant, if expected, upgrade this year to 6.5%.
With the economy recovering faster than the Office for Budget Responsibility had expected earlier this year, it means the economy should reach pre-crisis levels at the turn of the year - earlier than forecast.
- 2021: 6.5% growth this year, up from 4.0% forecast in March’s Economic and fiscal outlook
- 2022: 6% growth, down from 7.3% forecast in March
- 2023: 2.1% growth, up from 1.7% forecast in March
- 2024: 1.3% growth, down from 1.6% forecast in March
- 2025: 1.6% growth, down from 1.7% forecast in March
However, the International Monetary Fund predicted this month that the UK would suffer more longer-lasting damage than other G7 nations - despite the strong recovery in 2021 thanks to the vaccine rollout - after the economy shrank by nearly 10% in 2020.
Sunak says he should be able to restore aid spending to 0.7% of national wealth before end of this parliament
Sunak says he has made four judgments in the budget.
He says he will meet the fiscal rules “with a margin to protect ourselves against economic risks”.
He will continue to support working families.
He says he will restore aid spending to 0.7% of national income when the economic tests are met - and this is now forecast to happen before the end of this parliament.
And he will increase departmental spending by £150bn.
Sunak says the OBR is saying today the fiscal rules have been met.
Underlying debt is forecast to be 85.2% of GDP this year, he says. It will rise to 85.4% of GDP in 2023 before peaking at 85.7% in 2024.
It then falls in the final three years of the forecast from 85.1 to 83.3%, Sunak says.
Sunak sets out new fiscal rules
Sunak says he is setting out new fiscal rules.
First, underlying public sector net debt should be falling as a percentage of GDP.
And, second, in normal times the state should only borrow to invest. That means everyday spending must be paid through taxation, he says.
Sunak says the OBR expects the recovery to be quicker than originally forecast.
They think it will return to pre-Covid levels at the turn of the year.
Growth is now forecast to be 6.5% this year, followed by 6% next year.
Sunak turns to inflation, saying it is forecast to reach 4% over the next year.
This is a global problem, he says. It has been caused by rising energy prices and problems with supply chains.
It would be irresponsible to pretend these problems can be solved overnight, he says.
The UK cannot address them on their own. But it will act where it can.
He says the government has taken measures to address the HGV driver shortage, and today there is new funding to improve lorry parks.
And he says the HGV levy, already suspended until August, will be suspended for a further year. And vehicle excise duty for heavy goods vehicles will be frozen, he says.
Sunak says today’s budget does not draw a line under Covid.
But it begins the work of looking to a post-Covid economy. It will be an economy for a new age of optimism, he says, “where the only limit to our potential is the effort we are prepared to put in and the sacrifices we are prepared to make”.
Sunak says the government will always give people the support they need.
And it will level up. For too long the location of your birth has determined too much of your future.
Rishi Sunk unveils tax and spending plans in 2021 budget
Rishi Sunak opens by telling Laing that he has listened very carefully to her point.
Employment is up, investment is growing, public services are improving, the public finances are stabilising and wages are rising.
Eleanor Laing, the deputy speaker who is in the chair for the budget, starts with a statement about the pre-briefing of budget announcements. She says in the past stories have been briefed under embargo, for use after the statement has been delivered.
This year has been different. Information has been briefed for use ahead of the budget, she says.
(Laing’s summary of the situation is not quite right. This is something that has been happening regularly for years - although it has been more extensive this year than in the past.)
Laing says she hopes this will not happen again.
She tells Rishi Sunak they are looking forward to hearing “the remainder of your announcements”.)
Stephen Kinnock (Lab) says the steel industry needs support with high energy prices. Will the government put in place a wholesale energy price cap?
Johnson says this is an important point. Energy intensive industries have had about £2bn to help since 2013, he says.
And that’s the end of PMQs. The budget statement is starting now
Martin Vickers (Con) asks if the government will continue to develop renewable energy.
Yes, says Johnson. The UK now produces more offshore wind energy. That is going to increase massively, he says.
Zara Sultana (Lab) asks about donations to the Tories from fossil fuel companies. Will the PM pay back this money and never again take money from these companies?
Johnson says all Tory donations are registered in the normal way. He says the GMB opposes Labour’s policies because it sees them as anti-flight and anti-car.
Ben Bradshaw (Lab) asks if was a mistake to abandon all Covid measures in July. And if it wasn’t, why are the UK’s figure so bad?
Johnson says he sees no reason to deviate from the roadmap. He says the UK has the fastest economic growth in the G7.
Anna McMorrin (Lab) asks what is being done to protect women from spiking.
Johnson says spiking is already a criminal offence. People with information about this should contact the police, he says.
Robbie Moore (Con) asks the government for a new hospital in his constituency.
Johnson says there have been 120 applications for the biggest hospital building programme in a generation.
Sir Jeffrey Donaldson, the DUP leader, says the PM will know the damage the Northern Ireland protocol is doing to the settlement in the region. It is not sustainable. Does the PM agree the conditions exist to justify triggering article 16?
Johnson says he is sad to say Donaldson is completely right. They are working to reach an agreement with the EU by negotiation. If there is no “rapid progress”, the conditions for invoking article 16 have already been met.
David Warburton (Con) says today is national cheese toastie day, and Somerset is the home of cheddar cheese. He mentions a local producer making carbon-neutral cheddar.
Johnson says it should be international cheese toastie day.
Ian Blackford, the SNP leader at Westminster, raises the “dire” humanitarian situation in Afghanistan. He says 3.2m children under five could suffer acute malnutrition. The UK has a deep responsibility to the country. What is the government doing?
Johnson says the government must do all it can to mitigate the impact of the Taliban takeover. Aid to the country has been doubled, and the government is working with NGOs. But it will not write a blank cheque to the Taliban.
Blackford says there is a crisis. People are in need. It feels as if “the government is washing its hands of the legacy it left behind”. Promises on resettlement are also being broken, he says. The Afghan people are being left with no updates and vague targets. When will the resettlement scheme open?
Johnson says the UK will resettle 20,000 Afghans, in addition to the Afghans evacuated by the airlift. He says Blackford is wrong in the way he characterises what happens. The UK continues to engage with the Taliban; it was one of the first countries to reach out to them. It is insisting on safe passage for people wanting to come to the country.
Responding to the budget speech is one of the toughest tasks for the opposition.
And today it will fall to Rachel Reeves, the shadow chancellor, after Keir Starmer tested positive for Covid-19.
Miliband says Cop26 is not a photo opportunity. He says boosterism won’t work.
Johnson says the UK has cut emissions by 44%. He says the net zero plan will create jobs. Growth is up, he says. And if Labour were in power, the country would still be in lockdown.
Miliband says Johnson does not even know what is in his own budget. He has cut aid spending. He is also flirting with a new coal mine in Cumbria and allowing the Cambo oil field development. He says the PM’s own actions are undermining Cop26.
Johnson says Miliband is completely wrong. He says the UK is working with countries around the world to make Cop26 a success. He cites Indonesia, Australia and Russia as examples.
Miliband says the PM should not be making party political points on this issue. Hasn’t the PM made it harder getting agreement at the summit by cutting the aid budget?
Johnson says Miliband’s desire to keep away from party politics didn’t last long. He says the government is keeping its commitment to help developing countries with climate finance. He says the challenge is there; the leaders of the world need to rise to the challenge.
Miliband says it is easy to make promises for 2050. It is harder to do it for now. He says the PM “mustn’t shift the goalposts” for Glasgow. The focus must be on 2030.
Johnson says the focus will be on 2030.
He says 122 countries have made national determined contributions.
But he says they must not move in advance of what people are willing to do. That is what Labour is doing, he says. He says even the GMB criticised Labour’s climate change plans.
Miliband asks if the PM realises “how far away we are” from the action needed this decade.
Johnson says he does realise. But he also realises how far they have moved since Paris in 2015. They are trying to keep the goal of 1.5C alive, he says.
There are solid commitments being made. But it is too early to say if they will be enough.
“Just like the old days,” Miliband says as he starts.
It is “one time only”, he says.
He asks about Cop26. Does the PM agreed that we need to roughly halve global emissions to keep the goal of reducing global warming to 1.5C.
Johnson says Miliband is right to say they need to keep 1.5C alive. He says substantial pledges have been secured.
But he says it is “too early to say” if these pledges will be enough.
Sir Lindsay Hoyle says Ed Mililband is leading for Labour because Sir Keir Starmer is isolating.
Keir Starmer tests positive for Covid, leaving Ed Miliband to take PMQs for Labour
Ed Miliband is doing PMQs for Labour because Sir Keir Starmer has tested positive, Sky’s Beth Rigby reports.
And Boris Johnson has a mask too.
Rishi Sunak is putting on a mask for PMQs, the Mail’s Jason Groves reports.
PMQs will be starting shortly.
Labour’s Chi Onwurah has an update on mask wearing in the Commons.
Budget will include tax reforms made possible by Brexit, No 10 says
Downing Street has issued a statement about this morning’s cabinet, where the budget was unveiled. Mostly it does not tell us anything new about the contents of the budget, but it is a useful guide to the spin to the wrapped around it. It will be about “promoting high skills, high productivity and higher wages”, No 10 says, and the levelling up agenda will be the “golden thread” running through it.
The statement also suggests that Downing Street views the Covid crisis as coming to an end. It says the budget will be about preparing for “a new economy post-Covid”, and it says Boris Johnson opened cabinet by thanking the Treasury team for their work on the budget and for “their careful stewardship of the economy during the pandemic”.
But one paragaph in the readout is intriguing. It says:
[Rishi Sunak] stated [to the cabinet] that this budget prepares for a new economy post-Covid and is a budget that will take the opportunities leaving the EU has afforded us to deliver substantive reform of our tax system.
It is not clear what this means. Brexit would allow the government to cut VAT on fuel, but this is a Labour proposal (see 10.13am) that government sources have suggested Sunak will not be implementing.
The chancellor, Rishi Sunak, has conducted the traditional red box photo op on Downing Street, before heading to the House of Commons.
Here he is with members of the Treasury team, although not Simon Clarke, chief secretary to the Treasury, due to his agoraphobia (see 9.54am).
Rishi Sunak has been urged to use the budget to help families with “immediate pressures” through the winter, as pay rises alone are unlikely to make up for the cost-of-living crisis and universal credit cut.
Bridget Phillipson, the shadow chief secretary to the Treasury, said the chancellor was so far “giving with one hand and taking away with the other” as the national living wage rise would not in many cases make up for the £20 a week cut to universal credit and rising inflation.
Sunak is expected to announce a flagship measure to help with the cost of living at the budget, which is due to be announced in the Commons at 12.30pm.
He could offer help with energy bills, which have risen by 12% on average, and may also reduce the taper rate on universal credit (see 9.43am), which would allow those in work to keep more of their earnings.
Phillipson told Sky News:
A lot of families started receiving universal credit because of the pandemic. It is a massive hit to families’ incomes. We want to see immediate action to deal with the cost-of-living crisis facing families as we are entering a pretty tough winter for lots of people, but also businesses too.
We have had a lot of smoke and mirrors going into this budget, and it’s all very good and well the government promising things, but if that doesn’t lead to people feeling that extra support in their pocket, that will be the real test for the government.
Here’s the full story:
Miatta Fahnbulleh, chief executive of the New Economics Foundation, has been busting some of the familiar budget claims:
The NEF has argued for wide-ranging reform to universal credit to allow recipients to keep more of the money they earn.
Their proposals included lowering the taper rate from 63% to 50% (so for every £1 earned over their work allowance, a UC recipient would lose 50p, not 63p), and extending the work allowance.
Torsten Bell, chief executive of the Resolution Foundation, has more on the signifciance of the universal credit taper.
And here is Thérèse Coffey, the work and pensions secretary, leaving Downing Street this morning after the cabinet meeting where ministers were briefed on what would be in the budget.
Rishi Sunak is also expected to unveil new fiscal rules, after suspending restrictions on government borrowing early in the pandemic.
Those rules could force the government to balance the books for day-to-day spending with income by the end of the parliament, bring down the national debt in relation to the size of the economy, or rethink its spending plans if inflation pushes up debt repayment costs.
In the 2019 election manifesto, the Conservatives pledged that debt would be lower at the end of the Parliament (this was before the Covid-19 pandemic ripped up its plans, and much more), saying:
We will not borrow to fund day-to-day spending, but will invest thoughtfully and responsibly in infrastructure right across our country in order to increase productivity and wages.
Our fiscal rules mean that public sector net investment will not average more than 3 per cent of GDP, and that if debt interest reaches 6 per cent of revenue, we will reassess our plans to keep debt under control.
But some economists argue that investing to grow the economy is the best way to bring down debt levels... especially when borrowing costs remain relatively low.
As Michael Jacobs, professor of political economy at the University of Sheffield, wrote:
Public debt is indeed higher than in recent years, but it was more than double the current level after the second world war, when the economy grew particularly strongly. The ratio of debt to GDP is not a significant number, whether 100% or any other. Economically what matters is the cost of servicing the debt, and the value of the things that government borrowing is paying for.
Due to near-zero rates, the interest payments the government makes on its debt are now at their second lowest level in 70 years, at just 6% of tax receipts. The Bank of England now owns 37% of all government gilts, and repays the profit it makes on the interest back to the Treasury. (This has saved the government as much as £100bn over the last decade.) The Bank can continue to finance government debt at low interest rates, which means that financial institutions will continue to buy UK bonds: there is no sign of demand for them falling away.
The government therefore still has room for further sustainable borrowing. More important, it has many highly productive investments for which it should borrow.
This is from the Resolution Foundation thinktank explaining the significance of lowering the universal credit taper rate - which is tipped to be the surprise news story in the budget speech. (See 9.43am.)
Sir Keir Starmer has been tweeting ahead of the budget, highlighting Labour’s call for a six-month VAT cut on fuel.
The Independent’s John Rentoul thinks that, on this, Labour has made a mistake.
Many of today’s budget measures have already been well flagged, including raising the national living wage from £8.91 an hour to £9.50/hour, and ending the public sector pay freeze (although this may well not compensate for rising inflation).
Plus, almost £6bn of investment in buildings and technology to tackle NHS backlogs exacerbated by the pandemic, and £500m to help families. Sunak should also conclude the long-running review of business rates (though major changes may not be announced).
Here’s a breakdown of what’s expected:
Simon Clarke, who as chief secretary to the Treasury serves as Rishi Sunak’s deputy, has said that he will not be participating in the traditional pre-budget photocall outside No 11 later because he suffers from agoraphobia.
Clarke probably won’t be missed by the Treasury image police. He is 6ft 5in tall, which means that pictures showing him alonside Sunak (5ft 6in) are rarely flattering to the boss.
This is what Andy Burnham, the Labour mayor of Greater Manchester, told the Today programme this morning about what might be the surprise announcement in the budget.
On the rabbit out of the hat, I’m hearing that they are about to U-turn on universal credit, and actually that is a credit to the Labour party that’s campaigned on that particular issue, and I hope that is the rabbit that’s in his hat today.
The Mirror’s Dan Bloom says Burnham was referring to press reports that Rishi Sunak may lower the universal credit taper rate, which would allow people claiming UC to keep more of every extra pound they earn. It was reported last mont that the Treasury was considering this option.
Faster growth should hand Sunak a budget windfall
Rishi Sunak should have received a short-term windfall as he drew up his budget plans, thanks to a better-than-expected economic performance since March.
The independent Office for Budget Responsibility is likely to upgrade its growth forecasts for the UK this year, and cut its estimate for borrowing.
That would give the chancellor some room for manoeuvre, which could be put towards investing in public services, reducing borrowing, or set aside as a ‘rainy day buffer’ - which could later be used as a pre-election war chest, if conditions allow.
Economists believe the OBR will predict the UK economy will grow by around 7% in 2021. That would be a sharp upgrade on its previous forecast of 4%, and the strongest growth since the second world war (after shrinking 9.7% in 2020, the worst slump in a century).
Faster growth leads to higher tax receipts, creating less near-term pressure on the public finances.
The fiscal watchdog could also cut its forecasts for unemployment, which at 4.5% is currently below the OBR’s forecast for a peak of 6.5%.
Borrowing so far this year has undershot the OBR’s predictions, and the EY Item Club estimates full year borrowing will come in at just over £200bn, well below the OBR’s forecast of £234bn.
But the supply chain crisis, rising prices in the shops, and the energy price crunch mean squeezed households won’t feel the chancellor’s “age of optimism”. Plus, we’ve already had large increases in corporation tax and national insurance and the freezing of income tax thresholds earlier this year.
Inflation is also threatening the government’s longer-term fiscal plans, as it pushes up the cost of repaying the UK’s national debt, which has soared over £2.2tn under the pandemic.
Sunak has previously warned that a one percentage point rise in inflation, gilt yields and short-term interest rates would add £25bn to the cost of borrowing [although that’s less of a risk if it’s accompanied by faster growth and a higher tax take].
Plus, borrowing costs remain low by long-term measures:
Investec economist Philip Shaw says Sunak has two objectives today:
First, after the combination of plunging GDP over the pandemic and the huge fiscal support given to the economy, borrowing and outstanding debt have risen sharply. He must continue to endeavour to direct the public finances towards longer-term sustainability. Second, we presume that the chancellor will aim to create some space for pre-election tax cuts.
On both of these objectives he faces constraints such as; higher inflation, which pushes up the cost of index linked debt; a risk of stalling growth from (for example) component shortages; and the political need to provide near-term, targeted assistance to see households and firms through a period of higher energy bills. Under these circumstances he will also continue to be under huge pressure to backtrack official policy to reverse the temporary relief via universal credit.
The OBR could also reduces its estimate of the long-term economic “scarring” caused by the pandemic from 3% of GDP, perhaps to 2%. That would mean stronger future growth and tax receipts, which could create space for extra spending, or tax cuts, before the next election.
Good morning. Budget day is always an exciting moment at Westminster, but one of several unusual characteristics of today’s statement is that Rishi Sunak will be delivering it several weeks after announcing by far its biggest fiscal component. The £12bn a year health and social care levy unveiled in September was almost certainly more significant than any of the single tax measures we will hear today.
Another feature of this budget is that it was proceeded by an unprecedented amount of pre-briefing by the Treasury. We have had 19 press releases already about what it will contain.
So, what is going to make the statement we’re getting this afternoon significant, or memorable? There are probably two aspects that will stand out.
First, don’t despair, there will be news. This is a spending review, as well as a budget, and that means we will learn much more about departmental spending than we do in a normal budget. Also, for presentation reasons, the chancellor is going to want to have the usual surprise for MPs, and for the country, at the end of his speech. There is a lot of speculation this morning about quite what it will be, and on the Today programme Andy Burnham, the Labour mayor of Greater Manchester, suggested it could come in the form of a U-turn on the £20-per-week universal credit cut.
Second, as or more important than the multiple announcements on tax and spending will be the overall story that Sunak seeks to tell the country. He delivered his first budget in March 2020, but within a week he effectively had to tear it up because of the Covid pandemic and ever since his chancellorship has been dominated by dealing with that crisis. This will be the first budget he has written not dominated by Covid, and looking ahead to a more normal economic environment. It will be a moment of definition. Sunak presents himself as a fiscal conservative, with a picture of Nigel Lawson on display in the study. But he works for a prime minister whose economic model is more tooth fairy than Milton Friedman, and so the budget will have to resolve those tensions.
As Rowena Mason reports in her overnight preview, Sunak will accommodate Boris Johnson’s innate boosterism in his speech by declaring that we are in an age of optimism. Sunak will say:
Today’s budget begins the work of preparing for a new economy post Covid.
An economy of higher wages, higher skills, and rising productivity.
Of strong public services, vibrant communities and safer streets.
An economy fit for a new age of optimism.
That is the stronger economy of the future.
For millions of people facing rising living costs, it may feel more like anything but.
The cabinet met at 8.30am this morning, and Sunak is briefing his colleagues on the budget. Here is the agenda for the day.
12pm: Boris Johnson faces Sir Keir Starmer at PMQs.
12.30pm: Rishi Sunak delivers the budget.
1.30pm: Office for Budget Responsibility publishes the October 2021 Economic and fiscal outlook
2.30pm BST: Richard Hughes, chair of the Office for Budget Responsibility, holds a briefing about the OBR budget forecasts.
I will be writing the blog all day with my colleague, Graeme Wearden. We will be covering the build-up to the speech, the statement itself, and then focusing on reaction and analysis, and in particular trying to identify the small-print surprises that Sunak may have glossed over.