GOOD FOR, BAD FOR: REFORM'S SPRING BUDGET 2021 BREAKDOWN
The Chancellor's life was made a little easier today by the OBR's latest Economic and Fiscal Outlook. In what is undeniably good news, the fiscal watchdog predicts the recovery will be quicker (by six months) and unemployment lower (peaking at 6.5 per cent) than their previous forecasts. We should take a moment to recognise that this is in large part down to the remarkable speed of the vaccine roll out, as well as the ongoing financial support provided to businesses to protect jobs. Of course some uncertainty remains when the numbers are tied to the behaviour of the virus, and the economy is still expected to be 3 per cent smaller than it would otherwise have been in five years.
In terms of the meat of the Budget itself, there was little we didn't already know thanks to heavy Treasury pre-briefing (at one point I found myself wondering whether the hour-long speech was actually necessary). The super deduction tax was the 'rabbit', and a genuinely interesting one (see our analysis below). The Government is clearly banking on consumers going out and spending of their own accord once restrictions are lifted, with all the incentives aimed at stimulating business investment.
The Chancellor reiterated his weekend media pledge to ‘level’ with us: "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". The answer seemed to be a lot of fiscal drag (applied to multiple thresholds and allowances: income tax, inheritance, pensions, VAT registration, capital gains) and the much-discussed Corporation Tax increase (straight to 25% in 2023). Sensibly none of the tax increases are immediate.
Sunak also reaffirmed his commitment to being "fiscally responsible", citing three fiscal principles (don't borrow for everyday spending, ensure the debt is affordable, borrow while it's cheap to invest in capital projects) he would adhere to. But he stopped short of specifying what his fiscal rules will be: "This Budget is not the time to set detailed fiscal rules, with precise targets and dates to achieve them by – I don’t believe that would be sensible." We look forward to hearing a detailed plan in due course.
Read on for the best and the worst of Budget 2021.
👍 GOOD FOR
Continuing COVID-19 support
The extension of the various COVID-19 support initiatives was inevitable, but the Chancellor should be commended for phasing their withdrawal. The Job Retention Scheme (furlough) is extended to the end of September, two full months after ‘freedom day’, with the subsidy tapered from July. The red book price tag is almost £7 billion. We will see a further two rounds of Self-Employment Income Support Scheme grants, forecast to cost almost £13 billion, and increasing access to those newly self-employed last year (providing you filed your tax return!). In addition, the business rates holiday has been extended in full for three months, with a further nine months at two-thirds relief, up to a cap (that’s a further £7 billion), and the VAT cut is extended to end of September, with a further 50% cut until 31 March 2022 (almost £5 billion). And to help businesses prepare to re-open, the Government has set aside a £5 billion Restart pot – phasing grant availability based on the roadmap for sectors reopening, and tiering the amount based on the ‘hit’ that sector has taken. Sensible measures.
Protecting the taxpayer from fraud
Last September HMRC Perm Sec Jim Harra suggested 5-10% of CJRS payouts could be down to fraud or error. Reform warned about potential fraud in the furlough scheme as far back as April. The Financial Times in December reported that, in relation to Bounce Back Loans, senior bankers were worried “the scheme was being abused and defrauded on an industrial scale”. Today's announcement of a £100 million 'Taxpayer Protection Taskforce', made up of more than 1,200 people, is therefore very welcome. The red book also states that the Government "will significantly strengthen law enforcement for Bounce Back Loans". From the beginning government has – rightly – prioritised supporting huge swathes of the economy quickly, but this inevitably heightened the risk of abuse. It is right that the Government attempts to claw back some of that fraudulent expenditure and punishes the perpetrators.
The UK has long had a productivity problem: the latest international data shows us 16 per cent below the productivity average of our fellow G7 countries. This Budget is impressively creative in its ideas to change that. A new 130 per cent super-deduction tax will be introduced to incentivise business investment in new plants and machinery. The OBR estimate that this could boost investment by 10 percent, or £20 billion a year. To make this even better, the Chancellor should review what counts as deductable investment – focusing on plants and machinery appears to omit much needed investment in digital technologies.
The Treasury is also investing in SME productivity through a new 'Help to Grow' scheme which will provide both management training and mentoring and digital upskilling. It will also help 100,000 SMEs buy productivity-enhancing technologies with a voucher covering up half of the cost (up to a maximum of £5,000). A great idea.
👎 BAD FOR
Any extension in the UC uplift is welcome – families across the country are struggling to make ends meet and vacancies are still well below their pre-pandemic level – however the six-month extension looks like very poor planning. The extra £20 per week will be withdrawn at exactly the same time that the furlough scheme is ending, and unemployment is forecast to be heading towards its peak of 2.2 million. It is also striking that the uplift is set to be removed overnight, creating a cliff edge in support that the Chancellor has otherwise been careful about avoiding (see the COVID-19 support section above). Reform has argued that the uplift should be made permanent, but at the very least the Chancellor should have extended for a full year – and he’s only going to face the same backlash and battle about its removal come September.
NHS COVID fallout
Here at Reform we’re often most disappointed by the things that are missing in fiscal statements, and today is no different. One of the many, devastating, fallouts from the pandemic has been the increase in the NHS wait lists – which given the level of ‘missing’ activity last year are set to soar this year. The Budget failed to provide any additional investment to tackle the ballooning backlog. The waitlist stood at a staggering 4.52 million people in December 2020, and, perhaps most concerningly, those waiting a year or longer for care had increased by 7,139 per cent (you can read our recent analysis here).
As well as this, despite the possibility of the nation needing annual COVID-19 jabs, no additional money has been allocated to vaccines beyond this year. The OBR state: “The Government’s spending plans make no explicit provision for virus-related costs beyond 2021-22, despite its Roadmap recognising that annual vaccination programmes and continued testing and tracing are likely to be required”.
Inflationary housing policy
What’s the definition of insanity? You’ve got it, and here we are again with demand-side housing measures. Today’s Budget includes a three-month extension to the Stamp Duty cut introduced in May, followed by a tapering of support through to October. In addition, the Chancellor announced that the Government will back five per cent mortgages for homes worth up to £600,000. Both measures will likely further stimulate demand for property and in turn drive up house prices, which have already increased by seven per cent since May (see this graph from Sky Economics Editor, Ed Conway). That means the Chancellor may inadvertently be making it harder for those struggling to buy their first home, kiboshing his aim to "turn Generation Rent into Generation Buy'.
Here’s our regular reminder that social care needs sorting. Yes, we know you know.
Again, a fiscal event passes without mention of social care. Actually, that’s unfair, the words ‘social care’ do appear five times in the red book… as part of the name of the Department of Health and Social Care. Perhaps this is because last month the Health Secretary told us that the Government would publish its social care white paper later this year. But wait, in a letter to the Future Social Care Coalition dated 25 February, the Chief Secretary to the Treasury stated: “the Government is committed to sustainable improvement of the adult social care system and will bring forward proposals for reform next year.” So yet more kicking the social care can down the road?
Don't forget to join us on Friday at 11.00, where we'll be breaking down 'the good, the bad and the what now?' with Rt Hon David Gauke, David Smith, Economics Editor, The Sunday Times, and Miatta Fahnbulleh, Chief Executive, New Economics Foundation.
Tune in via our YouTube channel.