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Budget 2021 preview: What to expect from chancellor Rishi Sunak

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Budget 2021 preview: What to expect from Chancellor Rishi Sunak
Rishi Sunak is set to announce a raft of new measures to help Britain’s economy continue to bounce back from the COVID-19 pandemic. Photo: John Sibley/Reuters

Rishi Sunak is set to deliver his third budget as chancellor of the Exchequer on Wednesday, with a focus on tightening spending to reduce national debt to more sustainable levels.

The chancellor is set to announce a raft of new measures to help Britain’s economy continue to bounce back from the COVID-19 pandemic. He is also tipped to raise some taxes to help address the government deficit, which currently stands at £2.2tn ($3tn) as of the end of September.

However, as the UK recovers from the pandemic, it is unlikely that there will be any major giveaways. The biggest focus will be on spending allocations and public finances.

Over the weekend he confirmed that he was “looking to the future and building a stronger economy for the British people”.

Here's what we are expecting from the announcement and spending review to the Commons on Wednesday, which is due around 12:30pm UK time:

Borrowing

Britain’s budget deficit soared in the last financial year to 15% of GDP, the highest since the Second World War.

However, it is expected to drop to just over half that amount this year due to the end of emergency economic support such as the furlough scheme and universal credit uplift, and stronger tax revenues.

The chancellor is likely to set out a new set of fiscal rules that will constrain his ability to spend, and stop him borrowing to fund day-to-day spending within three years.

Borrowing so far this year is about £26bn below the Office for Budget Responsibility’s (OBR) forecast for 2021, leaving slight wiggle room to boost spending or absorb interest rate rises.

Read more: Public borrowing in focus for Sunak as inflation hits interest payments

“We expect 2021/22 borrowing to be revised down by around £60bn, taking the deficit down to £174bn,” Laith Khalaf, head of investment analysis at AJ Bell, said. 

“Outdated forecasts from the OBR [Office for Budget Responsibility], however, will likely understate the scale of borrowing outperformance, leaving room for a further downward revision next spring. Economically, things have generally turned out a lot better than the last fiscal forecast, delivered in March.”

Taxes

It has already been announced that there will be a hike to national insurance to provide funds for a COVID-crippled NHS and social care system. National insurance is set to rise by 1.25 percentage points, while corporation tax is set to rise to 25% by 2023.

The move is estimated to raise about £12bn per year, or £36bn over three years, breaking a Conservative manifesto pledge not to increase national insurance contributions (NICs), income tax or value added tax.

It is the biggest UK tax increase for 28 years, and comes despite a slew of criticism from both benches. Cabinet ministers, Tory MPs, the Labour party, business groups, and trade unions have all voiced their concerns. The tax has been mostly criticised for its potential for hitting young working people, while pensioners would avoid it.

Watch: What is National Insurance and do I have to pay it?

Due to this recent announcement, it is unlikely any further blockbuster tax changes will be on the cards on Wednesday.

Read more: How to cut your national insurance bill

“After the announcement of the corporation tax and NIC increases there are hints that there won’t be more tax rises in the Budget, but is this just delaying the inevitable,” accountancy firm BDO said.

“Future tax rises must still be a possibility, but they are unlikely to take effect immediately and are much more likely to be of the ‘stealth’ variety.”

Business rates

Sunak previously promised to publish the final findings of the government’s Business Rates Review this autumn, after delaying the report due to the ongoing coronavirus pandemic.

A number of retailers have received support from the government this year with extended relief during the pandemic. They will now be looking for further support as the relief comes to an end next year.

Business tax experts Altus Group estimated that business rates bills will rise by £1.04bn in England from April next year.

Retailers are still looking for further support as the business rates relief comes to an end next year Photo: Mike Kemp/In Pictures via Getty
Retailers are still looking for further support as the business rates relief comes to an end next year. Photo: Mike Kemp/In Pictures via Getty

It is expected that some reforms could be announced in the budget, however, others have questioned whether any changes will happen at all.

Nimesh Shah, chief executive of Blick Rothenberg, said governments have been ignoring business rates for years as it is “too difficult and too expensive” to reform.

Alcohol tax

According to recent reports, the chancellor could reform alcohol duty in the budget, taxing wine at a lower rate, and cider at a higher rate, among other possible changes.

It comes as the 2019 Conservative election manifesto promised to review it.

A number of brewers have called for alcohol duty to be cut to help them stay competitively priced as input costs like CO2 rise. Last week, Britain’s pub industry warned that 20,000 companies could collapse if beer duty rises.

"The government should stop trying to favour certain parts of the industry, instead focusing on removing distortions and creating a simpler system of alcohol taxes targeted at socially costly drinking," said Kate Smith, associate director of the Institute for Fiscal Studies.

Group of friends enjoying a beer at pub in London
The chancellor could reform alcohol duty in the budget. Photo: Getty

Pensions

The government has already announced that it will “temporarily” set aside the triple lock for the state pension as the current high rates of wages growth would push up pensions faster than general inflation.

Last month it was revealed that pensions will not rise by 8% next April, but will instead rise by the rate of inflation, which currently stands at 2.5%.

The triple lock ensures the state pension will increase in line with either the rate of inflation, wages, or 2.5% — whichever is highest.

Read more: UK staff pensions largely unaffected by pandemic

On Wednesday, it is likely that Sunak will look at tax relief for private pensions.

"The triple lock has played a role in boosting the incomes of pensioners over the past decade, but the current situation has exposed its flaws," said Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown.

"While the suspension is only for a year, the time has come to look at whether the triple lock is fit for purpose and remains the best way to preserve the long-term value of the state pension.”

Watch: When should I start paying into a pension?

A pensions grant system may also be on the cards, where the government could incentivise the self-employed to save for the long term, as they are currently left out of the auto-enrolment pensions savings system.

Read more: How much extra income could you have if you work past retirement age?

From April 2022, millions of UK state pensioners will receive a 3.1% pay rise, representing up to £288.60 over the year for those that receive the new state pension.

Minimum wage

The national living wage is also set to rise from £8.91 per hour to £9.50 this week, according to reports. This will mark a 6.6% increase for workers aged 23 and over, more than twice the current consumer price inflation rate of 3.1%.

The Living Wage Foundation has already been pushing for a rise to £9.50 an hour.

It comes after the £20-a-week temporary increase to universal credit payments recently came to an end in a bid to reduce public spending.

The Universal Credit cut is believed to have impacted 3.2 million working families.

Financial services

It has been reported that Sunak will cut the UK’s tax surcharge on bank profits from 8% to 3% in an attempt to boost the City of London’s competitiveness post-Brexit.

The change is set to come into effect in April 2023 as a countermeasure to the planned hike in corporation tax.

Banks currently pay 27% tax on their profits, after the 8% surcharge, and this is set to rise to 33% following the future corporation tax increase. This would make the UK uncompetitive for financial services firms and decrease its global attractiveness.

In addition to this, new listing changes may be announced. Before the spring budget, the chancellor already was looking at taking steps to overhaul Britain's stock market rules in a bid to convince more high-growth tech businesses and 'blank cheque' companies to list shares in London.

Read more: Rishi Sunak to lure tech and SPACs with UK stock market overhaul

It came amid concerns that the UK is falling behind other international markets when it comes to hosting stock market debuts for fast-growing technology firms, notably the US, as well as Amsterdam and Hong Kong.

Earlier this year, Amsterdam overtook London as Europe’s largest share trading centre, pushing the UK capital into second place as exchanges shifted order books abroad after Brexit.

Climate change

With the COP26 conference taking place next month, climate change is likely to be on the agenda.

The chancellor will want to show that the UK is playing its part in the effort to make the economy carbon neutral. We can expect further future investment or incentives for electric vehicles and green homes, as well as green tax announcements, which were lacking in the spring budget.

However, whether plans to use the tax system to align behaviour to the 2050 net zero pledge are announced at the budget, or during COP itself, remains to be seen.

Read more: UK launches £5,000 heat pump grants as part of homes decarbonisation drive

“To accelerate decarbonisation of the gas grid and the switch of domestic heating away from gas, the government could amend the VAT rules to make it easier for the 5% reduced rate of VAT to apply to energy saving measures installed by householders,” said Jayne Harrold, environmental tax leader at PwC.

“Using the VAT system to reduce the cost of investment would act as an added stimulus to upgrade the energy efficiency of the existing housing stock.”

He added: “While the government could announce a carbon tax, a simpler route would be to expand the scope of the new UK emissions trading scheme which is already in place.”

Watch: What is COP26?

NHS

Another commitment expected to be announced in the autumn budget is that the UK government will provide £6bn to the NHS to tackle backlogs caused by the coronavirus pandemic.

This is to take on the millions left waiting for diagnostic tests and non-emergency operations.

The investment in NHS capital funding will support the aim to deliver around 30% more elective activity by 2024-25 compared with pre-pandemic levels.

Read more: Budget 2021: Sunak to give £6bn to NHS

From the funding package, £2.3bn will be used to transform diagnostic services, with at least 100 ‘one-stop-shop’ community diagnostic centres across England, including the 44 already announced.

It also includes £1.5bn for increased bed capacity, equipment and new surgical hubs to tackle waiting times for elective surgeries.

Transport

Levelling up will be another key theme of the autumn budget to meet Sunak’s pledge of turning the UK into a high-skilled, high-tech economy,” said Andrew Duncan, partner and UK chief executive at Infosys Consulting.

Over the weekend it was announced that £7bn would be allocated to level up urban transport in cities around England. City regions will receive a total of about £5.7bn in sustainable transport cash, while another £1.2bn will go towards improving bus services.

“Great cities need great transport and that is why we’re investing billions to improve connections in our city regions as we level up opportunities across the country,” Sunak said.

“There is no reason why somebody working in the North and Midlands should have to wait several times longer for their bus or train to arrive in the morning compared with a commuter in the capital. This transport revolution will help redress that imbalance.”

Student Finance

Sunak is also predicted to reveal an overhaul of the student finance system, with plans to reduce the earnings threshold at which students need to repay loans.

According to the Financial Times, the changes will help solve the problem of the taxpayer “footing too great a burden” of funding university courses.

The current threshold for repayments stands at £27,295. ​​Two reviews into what the lower threshold should be, have suggested £23,000 and £20,000.

Read more: How to budget for university

The Institute for Fiscal Studies has said reducing the graduate earnings threshold to £23,000 would save the Treasury just under £2bn a year.

In addition to this, former education secretary Justine Greening said that maintenance grants, scrapped in the 2015 budget, should also be re-introduced.

"It is one of the reasons why students from the poorest families come out with the biggest debt and if we want to see levelling up happen in Britain that patently is an unfairness that needs to be tackled," she said.

Recovery Loan Scheme

The Recovery Loan Scheme is set to wind up at the end of December, however, with businesses facing spiralling costs in recent weeks, due to supply chain disruptions, and staff and raw material shortages, Sunak could announce an extension.

The scheme allows firms to borrow up to £10m with an 80% guarantee from the government.

Watch: What is a budget deficit and why does it matter?

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