Chancellor lays down a big spend today and tax tomorrow Budget – but he may have more to do

The Chancellor made the right judgement in yesterday’s bigger than expected Budget, by supporting the recovery in the next two years before turning to raising taxes in the middle of the decade – but he may have more work to do in order to plug gaps in support, tackle the living standards scarring from the crisis, and avoid another tight squeeze on public services, according to the Resolution Foundation’s overnight analysis of Budget 2021.

The Foundation’s report – Spending fast, taxing slow – highlights the scale of the Chancellor’s crisis spending today and tax rises tomorrow, with tax receipts as a share of GDP set to rise to 35 per cent by the middle of the decade – their highest level since 1969.

Even this major consolidation, delivered through the largest increase in corporation tax since the 1970s, was not enough to see the Chancellor achieving his fiscal goals of net debt falling as a share of the economy and a current budget balance without pencilling in another £4bn a year reduction in day to day public service spending that will be challenging to deliver.

The Foundation estimates that around £15bn of further consolidation would be needed by the middle of the decade to give the Chancellor enough fiscal space to credibly see net debt sustainably falling in the face of future recessions.

Other highlights from the overnight analysis include:

GDP rising, incomes falling

• While GDP is set to grow by 4 per cent this year, the fastest growth since the late 1980s, real household disposable incomes are actually set to fall marginally – highlighting the risk of the recovery not feeding through into living standards as unemployment rises.
• The poorest households will face a 7 per cent fall in income in the second half of 2021-22 due to the removal of the £20 a week Universal Credit uplift, which will take the basic level of benefits back to levels not seen since the early 1990s at the same time as unemployment is due to peak.

Levelling living standards growth

• Average wages are set to remain 4.3 per cent – or £1,200 a year – below their pre-crisis path by the middle of the decade.
• Living standards are on course to grow by just 0.3 per cent a year over this parliament – the worst on record outside the short 2015-17 parliament that was marked by the post-referendum inflation spike.

Austerity drags on for some

• Further planned cuts to public services spending will see budgets for unprotected departments (such as transport and local government) fall by £2.6bn next year (2022-23).
• By 2024-25, day to day public service spending per capita in unprotected departments will still be almost one-quarter lower than in 2009-10, with less than a fifth of the reduction in spending between 2009-10 and 2018-19 having been unwound.
• These spending cuts assume no further spending pressures elsewhere, which is highly unlikely given what’s in store for the NHS, schools and social care over the coming years.

Super-deducer or investment-reducer?

• While the Chancellor’s £24 billion super-deduction investment allowance boosts business investment in the short-term, over the long-term business investment is forecast to be permanently lower as a result of the large corporation tax rise.
• The policy’s focus on qualifying plant and machinery also only covers around a fifth of business investment, doing little for the intangible investment crucial to many service firms.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The Chancellor has gone big on both support for the recovery now and tax rises in future. This is broadly the right approach to take in terms of protecting the economy now, securing a recovery next, and repairing the public finances later.

“But the details of his plans leave serious questions to be answered about whether enough has been done to support households in the recovery to come, how credible it is that further reductions in planned spending can be delivered, and if the UK’s public finances have really been put on a sustainable footing long term.

“The improving outlook for GDP next year is not set to feed through into a boom for living standards, with unemployment forecast to rise and household incomes to fall. Long-term economic scarring also means that this is set to be the worst parliament for living standards growth on record, bar the short-lived 2015-17 term. Austerity will also in practice continue for many public services as further cuts were pencilled in.

“The Chancellor has delivered a big Budget, but whether it’s on tax or spend, there are many more big questions still to answer before the UK fully emerges from its worst downturn in 300 years.”

Notes to Editors

For more information contact Rob Holdsworth on 07921 236 972.