Chancellor Rishi Sunak presented his budget on Wednesday. It was the second budget of the year – there was a Budget in March too.
The fact that two major monetary reviews and a second raft of financial changes were required within eight months shows the scale of the challenges he, the government and we as taxpayers are facing.
Covid may not be beaten yet, the environment is becoming a major priority and Mr Sunak has to help the UK climb out of a recession, while paying back more than £270bn spent to fight the pandemic.
To add to the challenge, inflation – usually a key preoccupation of Chancellors – is running at close to 3% already, with the Office for Budget Responsibility forecasting it to pass 4% this year.
As if that wasn’t enough, the Chancellor had to find ways to support the government’s key policies of levelling up – bringing jobs and investment to the poorer regions of the UK and reducing the UK’s net greenhouse emissions to zero by 2050 to combat climate change.
At Continuum we are looking at how he is planning to meet all these challenges, and what it is likely to cost each and every one of us.
Facing financial challenges?
A rising cost of living and tax increases could further strain your household finances. For free initial advice call us at Continuum.
The Chancellor’s view
Given the scale of the challenges, Mr Sunak was surprisingly upbeat.
In his opening remarks he said that he believed the UK economy is forecast to return to pre-Covid levels by the beginning of 2022, with annual growth set to rebound by 6.5% this year, followed by 6% in 2022. Unemployment is set to fall as the economy recovers.
Government borrowing would fall from 7.9% this year to 3.3% next year, heading back to 1.5%.
The official view is that growth is higher and – crucially as far as the public finances are concerned – the estimate of the amount of long-term damage to the economy caused by the pandemic has been reduced.
In light of this he announced his aim to increase spending and reduce taxes. He did announce some tax cuts – in alcohol duties, freezing fuel duties for motorists and a business rate discount for the hospitality, retail and leisure sectors. But these have to be seen against the increases in corporation tax announced in March and the rise in national insurance contributions announced in September.
Mr Sunak says his budget delivers a stronger economy with stronger growth, better public finances and scope for more employment, giving people the support they need with the cost of living and levelling up. But it comes with a background of taxation that may be the highest since the 1960s.
So what measures did he announce?
Government spending With more to spend than originally expected there will be a real-terms rise for every government department. Departmental spending will rise by £150bn, and grant funding for local government of £4.8bn. Part of this is likely to go on increases in spending on pay for public sector workers and to cover the rise in the national living wage.
Education Funding for each pupil will be increased by the equivalent of £1,500 and 30,000 new special school places will be created
Levelling Up £1.7bn of funding will be provided in grants from the Treasury’s Levelling Up Fund, for towns and cities including Stoke-on-Trent, Leeds, Doncaster and Leicester. Libraries will be “renovated, restored and revived” and tax relief on museums and galleries will be extended until March 2024.
Infrastructure and investment The government will invest £21bn on roads and £46bn on railways to improve journey times between cities. Research and development spending will reach £22bn by 2026-27
Employment and skills The Chancellor is raising government spending on skills and training by 42% to £3.8bn and launching a new UK-wide numeracy service called Multiply.
Business taxes The bank surcharge will be cut from 8% to 3% and business rate increases will be scrapped, while a 50% business rates discount for companies in retail, hospitality and leisure sectors, up to a maximum of £110,000 will be provided.
Pubs and alcohol duty There are some major changes to alcohol duty with higher-strength alcoholic drinks, including stronger red wines, fortified wines and high strength ciders attracting higher duties. Lower strength drinks – such as rosé, fruit ciders and liqueurs – will attract a lower tax rate than currently. Pubs and bars will benefit from a new “draught relief” cutting duty on beer and cider.
Taxation and universal credit Reforms to the universal credit system that will enable those in work to keep more of what they earn.
Winners and losers
Of course, unless you are the Chancellor, or at least an economics expert, it can be hard to see exactly what these measures will mean in practice. As always, there will be winners and losers after a budget.
Those better off under the measures announced could include:
Benefit claimants The Chancellor provided temporary increases to Universal Credit during the pandemic. He has since announced their removal, causing some hardship. Now he has announced changes to the “taper”, which determines how much of the benefit is taken away as a claimant’s other income rises. The taper rate on each additional pound of income will fall from 63p to 55p. The change will take effect by December at the latest and help those already in work.
Drivers Petrol is at a record high price. Fuel duty earned the Government roughly £28bn last year. It was due to rise to 60.79p per litre Fortunately for drivers, the Chancellor froze fuel duty at 57.95p per litre.
Drinkers Duty on beer, cider, wine and spirits will be frozen for another year. The system will then be simplified: alcoholic drinks will in future be taxed according to the percentage of alcohol they contain. But there will be special treatment for draught beer “to recognise the importance of pubs with a cut in duty taking 3p off a pint.
Short-haul fliers Air passenger duty on domestic flights will be halved benefitting those who travel large distances within the UK, meaning domestic flights will become cheaper.
The lower paid The National Living Wage, or minimum wage, will increase to £9.50 an hour from £8.91 – an increase of £1,000 a year for a full-time worker. Around 2.5 million people will benefit.
Some Pension savers Low earners currently don’t get tax relief on their pension savings. This is changing, making it easier for around a million savers to build their pension pots.
Builders A new digital planning system has been given funding of £65m to take the planning regime digital and improve “certainty” for homeowners and developers. The Government said it hoped a digital system would ensure “better outcomes for the environment, growth and quality of design.” £24bn earmarked for housing, including £11.5bn for up to 180,000 affordable homes, with brownfield sites targeted for development.
Public sector workers Around five million public sector workers will get a pay rise.
What about your own personal budget?
To see what the Chancellors announcements will mean for your own personal budget and to improve your own economic outlook, book a consultation with a Continuum adviser.
Long-haul fliers With the environment as well as the treasury’s coffers in mind, a new “ultra-long-haul” rate of air passenger duty of £91 for journeys of more than 5,500 miles will be introduced.
Smokers Tobacco duty will rise by its usual amount of RPI inflation plus 2%
Council tax payers Local authorities would be able to increase council tax rates by 3% a year, which could add £40 to bills.
Property developers A 4% levy will be placed on property developers with profits over £25m to help create a £5bn fund to remove unsafe cladding
What should you do?
The Chancellor’s apparent generosity seems to have been made possible by the better than expected growth outlook coupled with last month’s announcement of higher national insurance and the frozen allowance announced back in March.
But rising inflation would offset rising wages and mean an increasing tax burden at least in the short term, before any tax cuts materialise.
Whether this will impact your financial plans will depend on your financial arrangements. But the good news is that may be possible to reduce your tax now – if you call on some professional help from the Continuum team.