It was a Budget of two halves.
Chancellor Rishi Sunak has confirmed that the UK Government has borrowed a staggering £355 billion this financial year, equivalent to 17 per cent of national income and the highest amount since the Second World War.
At the same time, Mr Sunak has become the first Chancellor since Denis Healey in 1974 to raise corporation tax and will increase the UK’s tax burden to its highest level since the 1960s.
Such a stark contrast speaks to the singular nature of this economic crisis. We have never seen anything like this before.
The general theme of today’s speech was sustained fiscal support in the near term and tax rises in the medium to long-term.
The Chancellor began with the latest forecast from the Office for Budget Responsibility (OBR), which predicts the UK economy to return to its pre-pandemic level by the middle of 2022 – six months earlier than previously forecast.
UK GDP is expected to grow by 4 per cent in 2021, 7.3 per cent in 2022 and then 1.7 per cent, 1.6 per cent and 1.7 per cent in the subsequent three years.
3 per cent of GDP will be lost permanently by 2025 as a result of the coronavirus pandemic.
Unemployment is expected to peak at 6.5 per cent – a much lower figure than previously thought.
That’s largely due to the fact that the Government has extended its landmark Coronavirus Job Retention Scheme (CJRS) until September, with businesses expected to contribute 10 per cent of the cost in July and 20 per cent in August and September.
Furloughed employees will receive 80 per cent of their usual working hours as normal.
Two additional grants will be made available to the self-employed under the Self-Employed Income Support Scheme (SEISS).
Newly self-employed workers who have submitted a tax return for the financial year 2019/20 will now be eligible.
In terms of grants for businesses, non-essential retailers will be offered a payment of £6000 per premises to enable them to recover, with this rising to £18,000 for hospitality businesses who will have to wait longer to reopen as per the Government’s roadmap out of lockdown.
This will take the total amount of cash grants handed directly to businesses during the course of the pandemic to £25 billion.
On VAT, the cut to 5 per cent for hospitality businesses will be extended to September, rising only to 12.5 per cent for six months after that.
Additionally, the 100 per cent business rates holiday will be extended to June, with COVID-hit firms only being asked to pay for one third in the subsequent months.
To support the housing market, the Chancellor has extended the stamp duty land tax holiday until June, with houses purchases under £250,000 benefitting from the nil rate until September.
A new Government-backed mortgage guarantee for homebuyers with only a 5 per cent deposit has also been announced, with a view to getting more first time buyers on the property ladder.
It is thought NatWest, Lloyds, Santander, Barclays, HSBC and others will begin offering 95 per cent loan-to-value mortgages from next month.
When taken together with all of the measures announced over the last year, total Government support for the economy now totals £407 billion.
According to the OBR, this equates to a peacetime record budget deficit in 2020/21 of £355 billion, followed by £234 billion in 2021/22.
These are truly astronomical figures for a government to be borrowing, but in an era of ultra-low interests the cost of managing the debt is manageable, for now.
The Chancellor pointed out that even in a 1 per cent rise in the Bank of England base rate could increase the cost of Government borrowing by £25 billion.
With that in mind, it’s no surprise that Mr Sunak set out major tax reforms.
Firstly, the personal income tax allowance (20 per cent) will be frozen at £12,570 until 2026. The higher rate (40 per cent) will also be frozen at £50,270 over the same period.
This ‘stealth tax’ will generate £6 billion a year for the Exchequer.
The inheritance tax threshold, pensions lifetime allowance, annual exempt allowance from capital gains tax and VAT exemption threshold have also been frozen.
Secondly, and most significantly, UK corporation tax will rise from 19 per cent to 25 per cent in 2023.
This will generate £17 billion a year and marks the first time since 1974 that a British Chancellor has hiked the corporate tax rate.
It will also increase the UK’s tax burden to its highest level since the 1960s.
Mr Sunak points out that at 25 per cent, the UK will still have the lowest corporation tax in the G7 and has ringfenced the policy for SMEs with profits of less than £50,000, who will still pay just 19 per cent.
To stimulate business investment, a world-first “super deduction” scheme has been announced under which, for the next two years, businesses investing in personnel, equipment or premises will be able to claim 130 per cent of the cost off their tax bill.
The OBR estimates this will increase business investment, which has been depressed in the last 12 months, by 10 per cent (equivalent to £20 billion).
Setting out the Government’s ambition for the future, the Chancellor closed out his second Budget by announcing a new £12 billion UK infrastructure bank for Leeds, a new Treasury economic campus in Darlington, and that Teesside would be one of eight sites across the country to be granted freeport status.
This Budget was historic in just about every sense of the word. It delivers a tax and spend regime the likes of which this country has not seen for many decades.
Business leaders give their reaction.
Tony Danker, CBI director-general, said: “This Budget succeeds strongly in protecting the economy now and kickstarting a recovery.
“But moving Corporation Tax to 25 per cent in one leap will cause a sharp intake of breath for many businesses and sends a worrying signal to those planning to invest in the UK.
“The Government must now have a laser-like focus on the UK’s competitive position in the round.”
Dr Adam Marshall, director general of the BCC, said: “There’s much to welcome in this Budget for business communities across the UK.
“The Chancellor has listened and acted on our calls for immediate support to help struggling businesses reach the finish line of this gruelling marathon and to begin their recovery.
“While no business will relish paying higher rates of corporation tax in future, the impact of the Chancellor’s tough decision is blunted by the big new incentives for investment, lower rates for the smallest firms, and the extension of coronavirus support measures in the short term.”
Lucy Winskell, chair of the North East Local Enterprise Partnership (LEP), said: “We welcome the Chancellor’s announcement of ongoing support for workers and businesses who have been impacted by the COVID-19 pandemic.
“As we see the continuing rollout of the COVID-19 vaccination programme, we are moving closer to more people being able to safely return to the workplace, and ongoing support for businesses at this time of transition will be a critical part of our economic recovery.”
Jonathan Walker, director of policy at North East England Chamber of Commerce, said: “We’re really pleased that the Chancellor supported many of our biggest business priorities today.
“Government has listened with the announcement of a business rates holiday, an extension of the furlough scheme and support for specific sectors like hospitality, as well as the great news about the new economic campus in Darlington.
“There is good news today, make no mistake, but the journey to recovery and genuinely closing the economic gaps in our country is only just beginning.”
Jonathan Scott, tax partner at Haines Watts, said: “I think businesses will be looking to fill their boots over the next two years.
“The 130 per cent tax super-deduction will be a major incentive to invest and we believe it will have the desired effect as companies will become more willing to make investments and we will see more cash moving around.”
Mike Scoular, EY’s North East managing partner, said: “Everyone was expecting this Budget to be a biggie, and the Chancellor did not disappoint.
“With a focus on COVID-19 support and recovery for businesses and individuals, the wider levelling up agenda could potentially have been put on the back burner, but it was not.”