Chancellor Rishi Sunak announces Budget 2021
Chancellor Rishi Sunak has delivered his Budget speech for 2021, with total departmental spending set to increase by £150bn over this Parliament, in a move described by Sunak as the “largest increase this century”.
Sunak says spending will grow in real terms by 3.8% a year and there will be grant funding for local government worth £4.8bn. Overseas aid will also return to 0.7% of GDP by the end of the parliament, after a cut to 0.5% announced last year.
However, The Institute for Fiscal Studies estimates average real-terms annual growth in departmental resource budgets was higher in previous years, above 4% in 2000 and 2002 under Labour, and 4.1% under the Conservatives in 2019.
We have created a detailed analysis of Today’s Autumn Budget and what these changes mean for UK businesses.
As part of the government’s tax and spending plans for the next year, Sunak also announced that inflationary pressures are affecting the UK economy, with the Office for Budget Responsibility (OBR) forecasting that inflation will average 4% next year.
He says the pressures are global in nature and are “impossible for us to address alone”. However the government will act to support households, he says.
Commenting on the Budget inflation forecast, Douglas Grant, Director of Conister, part of AIM-listed Manx Financial Group, said: “If the Office for Budget Responsibility’s inflation forecast of 4% over the next year materialises, this will lead to both raw material and labour cost rises, which will have to be passed on to the consumer. Otherwise, this will have a negative impact on firms’ working capital, something which is already scarce due to disrupted supply chains and the Covid-19 pandemic.
“This could lead to an acceleration of the number of government debt-laden SMEs seeking shelter through financial debt restructuring. So, whilst the extension of the Recovery Loan Scheme is welcome, we believe that the Government needs to use this extension period to agree a longer-term solution for the repayment of government debt. Whilst well intended and well received, it hangs over many of these businesses like the Sword of Damocles.”
National Living Wage and Business Rates
One of the other big announcements from the Chancellor was confirmation that the national living wage will increase from £8.91 to £9.50 an hour from April.
There were also some significant changes to business taxes, with the chancellor confirming that the bank surcharge will be cut from 8% to 3%. Sunak also says changes to business rates will be reformed to support companies, including a new 12-month relief for companies to invest in their premises. The chancellor says the investment incentives are worth £750m.
Next year’s planned increase in the business rates multiplier will also be cancelled. That is worth £4.6bn over the next five years, he says.
Sunak also announced a 50% business rates discount for companies in retail, hospitality and leisure sectors, up to a maximum of £110,000. It is a cut worth £1.7bn. The chancellor said: “This is the biggest single-year tax cut to business rates in over 30 years.”
However, Jane Parry, Managing Partner at PM+M, has concerns that Sunak’s announcement are shifting the tax focus to businesses.
She commented: “There was lots of great news around boosting spending across the public sector. However, the Chancellor is very clearly pushing the burden for paying for that onto business, with the National Living Wage Increase and scheduled corporation tax rate increases adding a significant burden to business. He seems to be banking on this plus the benefits of economic growth increasing the overall tax take to fund us out of Covid.
“From April next year, firms employing people on the National Living Wage will be facing more than an 8% increase in the cost of employing people when you combine the rise in the National Living Wage and the introduction of the Health and Social Care Levy.
“The limited tax reductions announced today, such as the reforms to business rates and the cancellation of the planned increase in the multiplier won’t do much to allay their impact on the industries that have been hit the hardest, including those employing the lowest-paid workers.
“These are the very sectors that have already been pushed to breaking point over the past 18 months and are still facing chronic people shortages and rising energy costs. Despite these pledges, they will have the unenviable, and potentially critical decision, of whether they absorb or pass on these costs to their customers simply in order to survive.
“Whilst the extension of the enhanced annual investment allowance for capital expenditure is welcomed, it will affect relatively few businesses. The planned 2023 increase in Corporation Tax from 19% to 25% will add significantly to the tax burden faced by companies of all sizes.”
The Chancellor also announced that he will cut the taper rate in universal credit from 63p to 55p. This will be worth more than £2bn. The work allowance will be increased by £500 too, which the chancellor says will be implemented no later than 1 December.
This announcement comes after the government cut universal credit by £20 a week from early October after a temporary uplift during the coronavirus pandemic, in a cut worth more than £5bn.
Other key announcements made by Sunak related to the cost of living include the increase in fuel duty will be cancelled, saving motorists £8bn over five years. When announcing the budget, Sunak said: after 12 years of freezing fuel duty, it will save the average motorist £1,900.
Sunak also said: “By the end of this parliament I want taxes to be going down, not up.”
Commenting on the budget’s impact on businesses and people, Michael Blaken, Head of Accounts at Optimum Professional Services, said: “There seemed very little in the Budget that hadn’t already been announced, that was noteworthy. “The measures were generally aimed at helping people on low incomes, or businesses in specific sectors.
“The Chanceller confirmed the increase from April of the National Living Wage and the National Minimum Wage and his ‘rabbit out of the hat’ at the end was to announce an imminent reduction in the Universal Credit taper – which he dubbed a ‘tax on working’ – from 63% to 55%.
“For those middle-income earners, there was very little, other than perhaps the announcement that fuel duty will be frozen.
“Little was said about taxation, other than the Annual Investment Allowance remaining at £1m until March 2023, which is welcome.
“We are interested to see what the planned reforms to business rates will be, and the new investment relief and business improvement relief sound positive, but as is always the case the devil will be in the detail.”
Education, Employment & Skills
In the delivery of the Budget, Sunak said funding for each pupil will be returned to 2010 levels, in an increase worth £1,500 a pupil. Sunak also confirmed the government is tripling investment to create 30,000 special school places, and total support for catch-up funding because of the Covid pandemic will be almost £5bn.
Additionally, the chancellor says the government will raise government spending on skills and training by £3.8bn over the parliament, an increase of 42%.
Sunak also confirmed the government will launch a UK-wide numeracy service called Multiply and said the programme will help 500,000 adults improve their numeracy.
Infrastructure and investment
Sunak announced £1.7bn of funding in the first grants from the Treasury’s Levelling Up Fund, for towns and cities including Stoke-on-Trent, Leeds, Doncaster and Leicester. Libraries will also be “renovated, restored and revived”.
Tax relief on museums and galleries was due to be announced in March next year; it will be extended until March 2024.
The chancellor says he will increase investment to support London-style transport across the regions of England and the government will invest £21bn on roads and £46bn on railways to improve journey times between cities.
Sunak also announced the government’s target for hitting research and development spending will reach £22bn by 2026-27, two years later than had been initially planned.
The government will invest £20bn in R&D by 2024-25. Sunak says this stands as a “record investment to secure the UK’s future as a global science superpower”. The Chancellor also announced he will limit tax relief for business R&D spending so that it only applies to domestic activities.
Benjamin Craig, Senior Manager R&D Tax Incentives at Ayming, comments: “It’s always encouraging to see the Government place such a strong emphasis on research and development, recognising its significance in stimulating economic growth. But while today’s numbers sound impressive – £20bn a year spent on R&D by the end of this parliament – the announcement may leave many in our industry scratching their heads as to where that investment is going to come from.
“There is further ambiguity around the Government’s projection for a 1.1% of GDP spend on R&D investment by 2027. Although we welcome any increase, we are a very long way off the target of 2.4% by 2027, which looks increasingly unlikely the closer that date appears.
“Changes to R&D tax relief which means cloud computing and data costs will be included from April 2022 is great news, albeit overdue, and reflects how the innovation landscape has changed since incentives were introduced. There is, however, room for concern over the Government’s pledge to incentivise greater investment at home, which may mean a crackdown on overseas sub-contracting. This could be bad news for some companies who are used to innovating in this way and, rather than bringing innovation home, could encourage them to carry on doing their R&D abroad.
“Innovation is crucial, especially if we are to become the science and technology superpower that the Government has promised. Today’s focus on innovation is promising but behind the buzzwords and big numbers we’re keen to see the detail to ensure that the views of the industry, gathered during the consultation on R&D tax relief earlier this year and still being analysed by the Treasury, have been incorporated.”
Growth and government borrowing
The chancellor says forecasts from the Office for Budget Responsibility (OBR) show the economy will grow by 6.5% this year, but Sunak says it will take until the start of 2022 for the economy to return to its pre-pandemic size.
Sunak also announced GDP will grow by 6% next year, 2.1% in 2023, 1.3% in 2024, and 1.6% in 2025. In March, the OBR had forecast growth of 4% this year, after a plunge of 9.9% in 2020 – the worst recession for 300 years. The OBR’s estimate for long-term scarring for the economy has been revised down from 3% to 2%.
Unemployment is forecast to peak at 5.2%, down from a forecast for about 12% forecast last year.
Sunak also says he is setting new “fiscal rules” for management of the public finances and debt must fall as a percentage of GDP. The Chancellor also said in “normal times” the state should only borrow to invest in future growth, balancing everyday spending and that this must happen by the third year of each forecast period.
Sunak says borrowing in the current financial year 2021-22 will be 7.9% of GDP and will fall to 3.3% next year, and debt levels will fall as a share of national income.
In March, the OBR estimated a budget deficit – the gap between spending and tax income – of £233.9bn for 2021-22, or about 10.3% of GDP.
Pubs and alcohol duty
Sunak announced radical changes for alcohol duty, in what he calls the biggest changes for 140 years. As part of these changes, the Chancellor announced the UK’s main duty rates on alcohol will be cut from 15 to six in a simplified system.
Further announcements made in relation to pubs and alcohol duty include higher-strength alcoholic drinks will attract higher duties, including stronger red wines, fortified wines and high-strength ciders. Lower strength drinks – such as rose, fruit ciders and liqueurs – will attract a lower tax rate than currently.
Pubs and bars will also benefit from a new “draught relief” cutting duty on beer and cider sold in pubs by the most since 1923. The cost of a pint will be permanently cut by 3p and there will be a small brewers’ relief, including for cider makers.
The chancellor says the reforms are taking advantage of leaving the EU to simplify the system, and the chancellor says alcohol duties are “full of historical anomalies” as it dates back to 1643.
Robert Salter, Director at leading tax and advisory firm Blick Rothenburg, commented on the changes made to the alcohol duties: “The changes to the alcohol duties regime in today’s budget will be welcomed by most beer and wine drinkers and the hospitality industry in general.
“However, while these changes will result in a small reduction to wine and beer prices – particularly in our pubs – through the reduction in alcohol duties, the reality is that this drop in alcohol duties will not be seen by the general public. Rather, costs in beer, cider, and wine prices in pubs, will increase because of the 6.6% increase in the National Minimum Wage and the already announced increase in employer NIC charges to 15.05% from April 2023.”
The Chancellor also announced £24bn was earmarked for housing: £11.5bn for up to 180,000 affordable homes, with brownfield sites targeted for development. A 4% levy will be placed on property developers with profits over £25m rate to help create a £5bn fund to remove unsafe cladding, and £640m a year will go to address rough sleeping and homelessness.
Ian Ruthven, Managing Director of Barratt Developments Yorkshire West, commented on today’s Budget announcement: “We welcome the support for housebuilding, increased investment in the planning system and the opening up of more sites on derelict and brownfield land. It is vital that we continue to increase housing supply to tackle the country’s shortage of homes, helping to create jobs and economic growth.
Sunak also announced flights between airports in the UK nations will be subject to a new lower rate of Air Passenger Duty from April 2023, and financial support for English airports will be extended for a further six months. From April 2023, new ultra long haul band in Air Passenger Duty for flights of over 5,500 miles will also be introduced.
Faisal Sheikh, Lecturer in Accounting and Finance at the University of Salford Business School, reacted to the Budget.
Faisal said: “I predict that from a policy perspective Monetarism will remain on the backburner and Keynesian economic policy (high spending underpinned by burgeoning taxes) will remain ‘King’ for at least a generation. The question is whether the British public can stomach tax rises which are currently funding the continued spending spree?
“The most eye-catching announcements are an extra £4.7bn for children’s education, an extra £2bn for further education and significant cut in Air Passenger Duty which be welcomed by the battered travel and tourism industry. There is also Christmas cheer with a cancellation of a planned rise in the duty on spirits, wine, cider and beer.
“Personally I find the cut to Air Passenger Duty problematic given that we are experiencing irreversible climate change and scientific experts are warning of mass environmental upheaval such as desertification and acute water shortages.”
And Zeeshan Syed, also of the University of Salford Business School, said: “Let’s get drunk, let’s travel more, and let’s spend more, the message couldn’t be louder. The UK is officially in recovery phase as per treasury plan. With all the advertisement and stress on building back better, this budget imagines only one solution that is to import more and pay more duty on it.
“The budget presented is neither enough nor ambitious to achieve what Britons wanted in post-covid world. More money to train our young and increase connectivity is welcome, but this does not go far enough. The raise in minimum wage does not reflect the rise in living costs, inflation, and expected cost of personal debt in coming months.
“Once again, the “grey hair” bias has won, and youth of the country has lost. Dividend and capital gains are not taxed, property speculation is not taxed, expensive cars and high-end dining is subsidised.
“It is understandable that Rishi wanted to support our biggest employer the hospitality industry and largest tax contributor financial industry. But he ignores the needs to avoid perpetual shortages of labour and skilled labour to fill our shelves, build our houses, and maintain our infrastructure. He needed to subsidise the heavy industry, increase minimum salary for skilled labour and encouraged the manufacturing.
“Had Rishi done so, he could have entered in the league of Margaret Thatcher and Gordon Brown. He could have fundamentally shifted the nature, orientation, and direction of British Economy. His budget is directly opposite to everything promised to us in 2016 referendum. But hey! the good news is let’s get drunk and don’t forget to eat more meat, provided if we can deliver the Beer to Pubs and Butcher animals locally.”