Rishi Sunak will use the budget and spending review on Wednesday to set out the government’s priorities up to the next election, while attempting to move on from crisis-management mode more than a year and a half into the Covid-19 pandemic.
The chancellor is expected to benefit from an improved economic outlook after a faster-than-expected recovery from the winter lockdown, although he must balance a desire to end emergency support with pressures from an unfolding cost-of-living crisis before a difficult winter.
Economy and public finances
Britain’s economy has recovered to close to pre-pandemic levels in recent months as lockdown measures have been relaxed thanks to the early introduction of the coronavirus vaccine, with the Office for Budget Responsibility expected to issue a robust GDP upgrade compared with its last estimate in March. Annual growth is expected to be upgraded from about 4%, possibly to as high as 7.5% for 2021, the fastest annual growth rate since the second world war.
However, while GDP recovered to just 0.8% below pre-Covid levels in August, the most severe shortages of workers and materials since the 1970s are holding back a faster recovery and driving up inflation.
Most attention will be on the OBR estimates for the long-term economic “scarring” caused by Covid, which will influence future growth and receipts. The Treasury watchdog forecast this to be 3% of GDP in March. A healthy upgrade could hand Sunak more headroom for tax cuts before the next election.
Sunak is expected to announce new “fiscal rules” governing the public finances, potentially including measures that would force the government to balance day-to-day spending with income, as well as measures to bring down the national debt in relation to the size of the economy.
The chancellor will announce the conclusion of the first multi-year spending review since 2015 alongside the budget, setting funding limits for Whitehall departments up to 2025. It is expected to be a tight settlement, after departments were asked to identify at least 5% savings from their day-to-day budgets.
Sunak has agreed to unfreeze public sector wages. However, it is unlikely that wages will keep pace with inflation, which is expected to peak at close to 5% in the months ahead.
After promises for ringfenced priorities, including health, schools and defence, the Institute for Fiscal Studies expects funding for unprotected departments, such as further education, local government and prisons, to face cuts of more than £2bn.
Funding for the NHS will rise after last month’s announcement from Boris Johnson of a £12bn-a-year package, funded by tax increases from next April through higher national insurance contributions for workers and businesses.
At the weekend the chancellor announced almost £6bn of investment in buildings and technology to tackle NHS backlogs exacerbated by the pandemic.
Business leaders are hoping for measures to offset higher taxes on them from the increase in national insurance contributions, and a rise in corporation tax from 19% to 25% planned from 2023. On the wishlist is an extension of the small business employment allowance and reforms to the apprenticeship levy.
The chancellor will confirm a new £1.4bn investment fund to attract international companies to invest in Britain. Sunak is expected to conclude a fundamental review of business rates in the budget, although major change to the system that taxes firms on the premises they occupy is not anticipated. Tweaks to allow companies to invest in green building upgrades, such as solar panels, without adding to their business rates bills could be made.
The Treasury believes much of its work before the Cop26 climate summit was done last week when the government published its net zero strategy review, which included £26bn in spending commitments. Of this about £14bn was new money, including funding for green technologies, flood defences and retrofitting homes and public buildings, as well as £5,000 grants for replacing gas boilers with heat pumps.
However, Greenpeace has calculated that an extra £25bn a year is needed to support the transition, with the added benefit of creating 1.8 million jobs.
Sunak announced at the weekend £6.9bn of investment in local transport outside London to improve connectivity across big city regions, including Greater Manchester, South Yorkshire and the West Midlands. However, it later emerged just £1.5bn was new money.
The chancellor has also already announced £2bn to turn brownfield land into new homes and £2.6bn to triple the funding for children with special education needs and disabilities.
Cost of living
The government will unfreeze public sector pay and raise the national living wage from £8.91 an hour to £9.50 in an attempt to dispel criticism that the Tories are standing by amid an unfolding cost-of-living crisis. However, the uplift is likely to be diluted because it will come in April alongside a regulated rise in household energy bills, and the increase in national insurance tax.
The Treasury is believed to have ruled out a VAT cut on household energy bills. Potential measures could include a further freeze in fuel duty to support motorists enduring record-high petrol prices, although this would chime badly with the government’s net zero ambitions.