Budget 2021: chancellor limits spending to start building election war chest

Rishi Sunak intends to cut taxes before the next general election, after limiting his budget help to deal with a winter cost of living crisis in order to start building up a war chest for the coming years.

The chancellor made clear that the boost to spending made possible by a stronger than expected economic recovery this year would not be repeated as he reassured Tory MPs that he would take action to reduce the UK’s highest levels of taxation since the early 1950s.

Hours after delivering his third budget speech, Sunak told his backbenchers: “I won’t mince words with you … it is my view that going forward every marginal pound we have should be put into lowering people’s taxes, not more spending”.

Earlier, the chancellor had sought to ease tensions with the prime minister by announcing increases in spending for all government departments for the next three years and major reforms to alcohol taxation that will cut the cost of drinking. An extra £25bn will be spent next year.

The package – designed to show how Britain could move on after the pandemic of the past 18 months – was criticised by environmental groups for a lack of new green measures ahead of next week’s UN Cop26 conference in Glasgow.

“This budget was an own goal for a government that should be leading the world into a new low-carbon age,” said Luke Murphy, at the Institute for Public Policy Research.

And Labour condemned it for its failure to help households struggling with rising prices.

Rachel Reeves, the shadow chancellor, who stood in for a Covid-stricken Sir Keir Starmer to give Labour’s response to the budget, said: “Families struggling with the cost of living crisis, businesses hit by a supply chain crisis, those who rely on our schools and our hospitals and our police – they won’t recognise the world that the Chancellor is describing. They will think that he is living in a parallel universe.”

Reeves highlighted the fact that Sunak had cut taxes on banks, sparkling wine, and domestic air travel, but had little to offer many voters. “At least the bankers on short haul flights sipping champagne will be cheering this budget today.”

After being upbraided by deputy speaker Eleanor Laing for revealing so much of his budget in advance, Sunak’s one surprise was to announce a partial government climbdown on its controversial decision to save £6bn by ending the temporary £20 a week increase in universal credit brought in at the start of the pandemic.

The chancellor handed back £2bn to working UC claimants by lowering the rate at which their benefits are reduced when their pay goes up, and made it clear he saw the move as the start of a new tax-cutting direction for the government.

“I want to say this simple thing to the House and the British people”, Sunak said. “My goal is to reduce taxes. By the end of this parliament, I want taxes to be going down not up.

“I want this to be a society that rewards energy, ingenuity and inventiveness. A society that rewards work. That is what we believe on this side of the House. That is my mission over the remainder of this parliament.”

Conservative MPs greeted the budget enthusiastically – particularly the spending pledges directed at a slew of constituencies for everything from turning derelict land into “pocket parks,” to a new Beatles attraction on Liverpool waterfront. Many later tweeted pre-prepared messages highlighting the investments in their local area.

Sunak’s spend now, cut taxes later approach was made possible by rosier short-term forecasts for the economy provided by the independent Office for Budget Responsibility, which revised up its 2021 growth forecast from 4% to 6.5% and reduced its estimate of the long-term “scarring” to the economy from the pandemic.

The OBR said the stronger growth outlook coupled with the money raised from last month’s announcement of higher national insurance to pay for health and social care had provided Sunak with £50bn of additional resources to deploy in the budget, of which he spent £30bn.

But the government’s fiscal watchdog warned that rising inflation would offset rising wages and result in living standards being virtually unchanged next year.

“We expect 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. And it could hit the highest rate seen in the UK for three decades.”

Paul Johnson, director of the Institute for Fiscal Studies, described the outlook for household finances as “actually awful”.

Torsten Bell, chief executive at the Resolution Foundation thinktank, said Sunak had used his OBR “windfall” to deliver a “Boris budget”.

“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.”

Neil Shearing, group chief economist at Capital Economics, said: “This budget was perhaps more notable for what the Chancellor didn’t do rather than what he did. 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 the Chancellor to start building a war chest that could be deployed ahead of the next election.”

The current parliament will run until May 2024, although there is speculation Johnson is preparing to go to the country in 2023.

The Treasury said £30bn of green measures had been announced as part the government’s net zero package last week.

But Darren Jones, the Labour chair of the Business, Energy and Industrial Strategy Committee, said: “This budget was a missed opportunity on climate change, failing to set out the required leadership on the fiscal measures needed to accelerate progress towards our net zero target. Mere days ahead of the Cop26 international climate change summit, it’s concerning that the Treasury missed this chance to spell out the benefits of net zero and instead took regressive action, such as cutting taxes on domestic flights.”