Finance minister Rishi Sunak extended costly emergency programmes to see Britain’s economy through the COVID-19 crisis but announced a future tax squeeze on businesses and individuals as he began to focus on the huge hole in the public finances.
Sunak said the economy will regain its pre-pandemic size in mid-2022, six months earlier than previously forecast, helped by Europe’s fastest vaccination programme.
But it will remain 3% smaller in five years’ time than it would have been without the health shock and extra support is needed now as the country remains under coronavirus restrictions, he said.
“First, we will continue doing whatever it takes to support the British people and businesses through this moment of crisis,” Sunak told parliament.
“Second, once we are on the way to recovery, we will need to begin fixing the public finances – and I want to be honest today about our plans to do that. And, third, in today’s Budget we begin the work of building our future economy.”
Among new support measures were a five-month extension of Britain’s huge jobs rescue plan and more help for the self-employed, the continuation of an emergency increase in welfare payments, and an extended VAT cut for the hospitality sector.
A business rates exemption for retail, hospitality and leisure businesses was extended until the end of June, by when Prime Minister Boris Johnson hopes he will have lifted most COVID-19 restrictions.
An existing tax break for home-buyers will also now run until June 30 and will then apply for cheaper homes until the end of September.
Sunak will borrow significantly more in the coming financial year than thought just a few months ago – 234 billion pounds, or 10.3% of gross domestic product, compared with a previous estimate of 164.2 billion pounds, or 7.4% of GDP.
Instant View: Tax hikes blur UK’s Sunak “whatever it takes” budget
British government bond prices fell sharply, with 10-year gilt yields rising more than 8 basis points. The Debt Management Office said it planned to sell 296 billion pounds of gilts over the coming year, well above the 247 billion pounds markets had expected in a Reuters poll.
To bring borrowing under control, Sunak announced future tax rises that will increase the tax burden to its highest level since the 1960s, rising from 34 to 35% of GDP by the middle of this decade.
“Chancellor Sunak confirmed earlier reports that the government will start introducing some fiscal austerity measures in an attempt to boost the UK fiscal outlook,” Valentin Marinov, head of G10 foreign exchange research at Credit Agricole, said.
“The UK is thus to become the first major economy to consider such measures.”
Britain has suffered the biggest COVID-19 death toll in Europe and its economy has been the worst hit among big rich countries, shrinking by 10% last year, its worst slump in three centuries.
Many companies are also under strain from Brexit after Britain left the European Union’s single market on Jan. 1, and the government faces the challenge of huge investment to meet its promise to create a net zero carbon economy by 2050.
UK EARLY MOVER ON TAX HIKES
Announcing forecasts by the Office for Budgetary Responsibility (OBR), Sunak said the economy was likely to grow 4% in 2021, slower than a forecast of 5.5% made in November, reflecting the current lockdown which began in January.
Looking further ahead, the OBR forecast GDP would grow by 7.3%, 1.7% and 1.6% in 2022, 2023 and 2024 respectively. In November, the OBR had forecast growth in those years of 6.6%, 2.3% and 1.7%.
Sunak promised to do “whatever it takes” to steer the economy through what he hopes will be the final months of pandemic restrictions.
He has already racked up Britain’s highest borrowing since World War Two, with the deficit reaching an estimated 17% of GDP in the 2020/21 financial year that ends in April and set to fall to a still historically high 10.3% in 2021/22.
In a first move towards higher taxes, Sunak announced he would raise corporation tax to 25% from 19% from 2023, by which time the crisis should be over.
“Even after this change the UK will still have the lowest corporation tax rate in the G7 – lower than the United States, Canada, Italy, Japan, Germany and France,” he said.
Businesses with profits of 50,000 pounds or less would pay a new Small Profits Rate, maintained at the current rate of 19%.
To offset the hit, Sunak increased incentives for investment in items such as new equipment over the next two years. “This will be the biggest business tax cut in modern British history,” he said.
Sunak also said he would freeze in a year’s time amount of money that people can earn tax-free and the threshold for the higher rate of income tax until 2026.