Autumn Budget 2021 summary

Sunak presented a high spending Budget but plans for economic growth

Economic overview

Chancellor of the Exchequer Rishi Sunak’s second Budget this year provided some better news on the state of the economic recovery. However, higher inflation looms due to global energy prices, and many pandemic related challenges remain.

Sunak’s speech focused on providing support for households and businesses, and sought to progress the government’s levelling-up agenda of increasing investment in local infrastructure outside of the capital.

Against the backdrop of the pandemic, the Office for Budget Responsibility (OBR) forecast the following figures:

The OBR also forecast borrowing to peak at 15.2% (£320 billion) of gross domestic product (GDP) in 2020-21, reducing to 7.9% (£183 billion) in 2021-22 and dropping to 3.3% (£83 billion) in 2022-23.

Inflation

Sunak outlined how our emergence from the pandemic has led to rising inflation. He pointed out how demand for goods had risen more quickly than supply chains could meet and how global demand for energy surged while supply had been disrupted. The OBR forecasts CPI inflation to average 4% in 2022, before falling to 2.6% in 2023 and eventually back to 2%.

The Budget offered little in terms of specific measures to counter inflation. However, in our view, some government policies introduced prior to this Budget may dampen inflation and influence the timing of future interest rate rises. These include:

• Increase in National Insurance by 1.25% from April 2022, to be spent on the NHS and social care

• Increase in Corporation Tax from 19% to 25% from April 2023 for profits of more than £250,000

• Freezing of lifetime pension allowance at £1.073 million, a level that will remain in place until 2025/26.

Sunak did not make any substantial additional announcements relating to tax reliefs or pensions.

The Chancellor also highlighted that government borrowing was at its highest level since the Second World War and introduced a charter to set limits on this debt.

Spending

Even so, this is being described as a high spending budget, with key initiatives including:

• £177 billion extra spend on the NHS and social care by the end of this parliament

• A cash increase in government departmental spending of more than £150 billion a year by 2024-25

• £4.7 billion extra funding for schools, with a focus on special needs schools

• An increase of £3.8 billion on skills development and lifelong learning by 2024-25

• Greater investment in housing and home ownership, with the aim to build 1 million more homes.

Sunak stressed how the only way to fund spending is through higher growth and he outlined how he plans to achieve this through infrastructure spend. For example, £2.6 billion will be spent between 2020 and 2025 on a new pipeline of more than 50 local road upgrades in England. In addition, more than £5 billion is earmarked for local roads maintenance. The Chancellor also announced an agenda to address the UK’s regional infrastructure inequalities.

Other things to know

• The alcohol duty system will be simplified, with drinks taxed in proportion to their alcohol content

• Fuel duty rates will be frozen for the 12th consecutive year

• Amendments have been made to Universal Credit that amount to an estimated £2 billion tax cut for the lowest paid working families

• There will be a 50% business rate discount for the retail, hospitality and leisure sectors in England to 2022-23, to a maximum of £110,000

• Domestic Air Passenger duty will be reduced from April 2023, although there will be a new ultra-long-haul band Air Passenger duty

• The £1 million annual investment allowance will not end in December, but will be extended to March 2023

• The government is freezing the business rates multiplier for a further year, a cut worth £4.6 billion over five years.

Where did Sunak disappoint?

There was less than expected announced for green initiatives. The cancellation of planned fuel duties increases were justified by record high prices, while the cut in air fare duties within the UK were heralded as a Brexit prize. Yet both are a step backwards in the green agenda and will receive criticism accordingly, especially as the UK is hosting COP26.

Conclusions

Overall, the latest budget announcement had some good news on the outlook for the economy, but also highlighted some major challenges. The Chancellor skilfully offered a buffet of spending increases, but avoided talking about some big tax increases that partially offset the fiscal benefits.