Rishi Sunak’s Budget and spending review is like none other in post-war economic history.
The Chancellor seeks to chart a course out the deepest recession since 1930s, restore some responsibility to the public finances, and address runaway inflation and its effect on citizens and businesses all at once.
This is before he even addresses the post-Brexit hangover.
Sunak left no doubt about where he wants us to go. His speech in which he praised traditional Tory values and a low-tax economy was a big hint.
His goal is for him to have a war chest of tax-cutting funds before the next election. If everything goes to plan, he should have at least £20billion to £30billion to lavish on voters by 2024-25 and – barring accidents – the next election.
The sheer magnitude of the fiscal calculations involved is truly amazing.
Rishi Sunak, Chancellor of Exchequer, delivers his Budget to Parliament on Wednesday
After delivering his Budget, Mr Sunak took photos at Fourpure Brewery, Bermondsey.
The Chancellor approaches the recovery from Covid-19 with the highest tax burden on the British people for 73 years which is when the then government was, like Sunak and Boris Johnson, seeking to escape the legacy of ‘wartime’ borrowing and debts.
Sunak is also insisting on the acceleration of public spending. He acknowledges that the state must pick up some of the work, as the economy is being hampered by high energy costs and supply chain bottlenecks, and business is already struggling to recover.
In essence, he is increasing public spending by some £30billion a year, which is a remarkable gamble with the public finances for a Tory chancellor.
That means that by the end of the forecast period in 2024-25, the state’s share of spending as a proportion of GDP – at 41.6 per cent – will still be the highest since the bad old days of Labour in the 1970s.
This was a terrible event that many of us can still remember. It led to a crisis and an International Monetary Fund rescue. Washington also issued an order for drastic cuts in public spending.
Since then, the world has changed drastically.
The consensus is that with the right fiscal disciplines in place it is possible for governments to borrow for big infrastructure goals such as levelling up, while an independent Bank of England ought to act as a bulwark against higher inflation which didn’t exist in an earlier age.
The Government is on a dangerous journey, but there is no way to deny it.
The Budget’s announcement about fundamental changes in alcohol duties has grabbed all the attention. The biggest impact in reality is the disruption to Universal Credit.
The Covid £20-a-week special payment is being replaced by an incentive to work costing the Exchequer £11billion over the Parliament.
The truth is, the Chancellor made his most important tax decisions before his latest economic statement.
Prime Minister Boris Johnson was beside the Chancellor as he addressed lawmakers
In March he announced a big rise in corporation tax that will raise £25.7billion a year by 2026-27. Similarly, by freezing tax allowances, income tax revenues will soar by £13.9billion by the same year.
And the fiscal watchdog the Office for Budget Responsibility calculates that the surcharge on national insurance, the cleverly named Health and Social Care levy announced in September, is eventually set to raise £18.2billion in a single year.
One fully understands the Treasury’s desire to restore some credibility to the public finances. Tax increases of this magnitude are completely against Conservative values.
They will, in my opinion, deliver a crushing blow against expansion and growth. This is evident in the Budget’s forecasts.
Yes, Covid’s bounce back is more than expected, with output set for an increase of 6.5 percent this year and 6% the next year.
We have already seen this year that surging growth has led tax receipts from VAT, corporation tax and income and wealth taxes to climb, helping to reduce borrowing by £34.7billion this year and more than £50billion next.
This is simply supply side economics. The lower the taxes, the greater the incentives to work, spend and earn profits – and the larger the contribution to growth.
It is not an accident that the economy will see a slowdown as higher national insurance fees and increased company taxation start to bite next fiscal year.
In 2023 growth will still be a respectable 2.1 per cent but in later years Britain’s economy will be nearly static, expanding at just 1.3 per cent in 2024 when the full force of the tax rises are felt.
Taxes on companies and jobs discourage investment and encourage enterprise. This is a clever political calculation.
The increased revenues from higher taxation allow the Chancellor to build his reserve for future election winning tax cuts with surpluses on day-to-day tax and spend starting to build from 2023-24 onwards, reaching a handsome £33bn by the end of the forecast.
This allows the government to give back some of what it has taken from taxpayers.
But it is a complex juggling act, which could be blown off the water by rising interest rates and inflation – or a Geo-Political shock like a war in Taiwan Strait.
Be ready to reach for your lifebelts