Sunak’s Keynesian Budget unpacked

Presenting the budget today Rishi Sunak promised a great deal of spending, with few tax rises in sight. It was undeniably the most Keynesian Tory budget since the days of Edward Heath. Perhaps we should not be surprised considering the extent of the pandemic’s economic damage. The Office for Budget Responsibility, while predicting the recovery will be quicker than expected and that the economy would grow by a red-hot 7.3 per cent next year, also said that in 2025 the economy will still be 3 per cent smaller than it would have otherwise been.

Sunak split his Budget into three major parts.

The first focused on extending, and even expanding, a great deal of the support offered during the pandemic even after 21 June, when the government plans to lift remaining lockdown restrictions. Sunak’s biggest move here was committing to extend the furlough until the end of September – with the only change being businesses being asked to contribute 10 per cent more from July and 20 per cent more from August.

In terms of help for businesses, the support for the self-employed is also being extended until the end of September and the newly self-employed who filed their first tax returns in 2019/20 can now also claim the benefits. Yet many will likely be disappointed that owners who mainly pay themselves via dividends are still being left out.

Still, there are other sweeteners focused on helping businesses reopen and get back on their feet following the lockdown. The most eye-catching proposal was grants to help reopening – £6,000 for essential businesses and £18,000 for non-essential businesses which will only be allowed to reopen later. Recovery loans worth up to £10 million were also announced with the government guaranteeing 80 per cent of their value. The battered culture sector will receive special assistance from a £300 million recovery fund. The hospitality and leisure sector is looking at an extension to business rates reduction and a further cut to VAT.

Sunak also announced that the £20 increase to Universal Credit is being extended for another six months and a one-off £500 payment to Working Tax Credit claimants.

Also of note was a bung for the housing sector with stamp duty holiday being extended and a new mortgage support scheme.

Having promised a splurge Sunak turned to the second part – taxes – talking solemnly of how it would be “irresponsible” to let public debt rise further. Corporation tax is set to rise to 25 per cent, but only in April 2023 which lets him avoid the risk of choking off the post-pandemic recovery. The only other real increase was done stealthily by freezing income tax thresholds so they no longer rise with inflation. But the freeze only happens after the previously promised increases take effect. In total, the new taxes should bring in an extra £17 billion and £8 billion each a year by 2025/26. Meanwhile, many other taxes – National Insurance, VAT, duties on fuel and alcohol, and inheritance tax – are all being frozen.

Sunak also proposed a startlingly ambitious tax break, a 130 per cent “super -deduction” for businesses making investments in improving productivity. In effect, the government will be paying them to invest in this area.

At first glance the tax increases seem remarkably modest. However, according the OBR the cumulative effect will be that by 2025/26 the tax burden will rise to 35 per cent – the highest since Labour Chancellor Roy Jenkins in the late 1960s. Indeed, the Confederation of British Industry warned that the proposed corporation tax increase “sends a worrying signal to those planning to invest in the UK” and would prompt “a sharp intake of breath” among employers.

The third and final part focused on the government’s commitment to “Build Back Better”. The three most striking proposals here were the promise to set up a new “Treasury North” campus in Darlington near Teeside, establishing freeports in eight locations across the country including Teeside, and finally committing £12 billion for a new infrastructure bank based in Leeds. A new £4.8 billion “Levelling-up Fund” and various chunks of funding for towns in Scotland, Wales, and Northern Ireland were trailed.

Some more cynical observers might notice how the spending appears to complement Tory political priorities. Teeside is after all home to a crop of new Tory MPs and Conservative Mayor Ben Houchen who is campaigning for re-election in May. Meanwhile, the generous funds for Scotland come as the government tries to quell calls for independence.

Keir Starmer struggled to respond to the Budget as powerfully as Labour would have hoped. Responding to such a vast and technical document on the fly is always tricky. The fact that Sunak had parked so many tanks if not on Labour lawns made it even harder. Criticism of Sunak for failing to announce new measures to help social care and the NHS – both battered by the pandemic – was his strongest attack line. Calls to increase sick leave will also probably be popular. Finally, calling on the government to make the £20 increase to Universal Credit permanent is red meat for the party.

Yet the rest of his attacks mainly focused on the government not going far enough – and blaming the severity of the pandemic’s toll on the austerity of the Cameron-Osborne years. But the debate has moved on – with Boris banning Tories from so much as mentioning the “A” word – and Starmer reduced in large part to simply calling on the government to do more shows he is struggling to articulate his own new vision.