A masterclass in expectation and political management, even if the economic impact is less clear.
Overall this Budget was a masterclass in expectation management by the Chancellor and his team. The tax rises announced – both on Corporation Tax and freezing the personal allowance – were significant yet had been so heavily trailed that they did not come as a surprise. Indeed, in delaying the increased rate of Corporation Tax to 2023 and creating a new ‘small profits rate’ kept at the existing 19 per cent, if anything the Chancellor managed to surprise on the upside – and certainly deflected much of the potential criticism from Labour and his own backbenches.
Yet for all the focus on tax rises, this was yet again a massive giveaway Budget by the Chancellor on a scale close to unthinkable pre-Covid. Most notably, the addition of a new “Super Deduction,” which enables businesses to claim back 130 per cent of investment against tax over the next two years, was a ‘rabbit,’ potentially worth around £25 billion. For those concerned about the impact of Business Rates and other taxes on UK businesses ability to invest this represented a significant win. There was also additional investment in infrastructure, with the announcement of £12 billion of funding for the new UK Infrastructure Bank which will be based in Leeds. There were other large regional giveaways including £1 billion of funding for new Town Deals to help the Government make progress on its levelling up agenda. In the least surprising news of the day, fuel and alcohol duty were again frozen, providing some good news for those looking to enjoy themselves when lockdown ends.
Also, as expected, there was significant additional spending on Covid support, with a continuation of the main schemes well beyond the end of lockdown. This represents a sensible economic decision, giving additional breathing space for the economy to recover. The 6-month extension to the £20 increase to Universal Credit was an exception in this regard, taking support away from the least well-off right as we expect unemployment to peak later this year. However, business will strongly welcome the new £5 billion Restart Grant fund, as well as the new business loans scheme to replace existing measures.
While this Budget was a masterclass in expectation management, whether it was a masterclass in economic management remains to be seen. Certainly the Chancellor has done nearly everything he can to help businesses during the crisis and enable the economic recovery. However, it is uncertain how much of a dent he will have made in genuinely restoring the public finances and cutting public debt. The long-term economic projections, already uncertain, look increasingly unrealistic. In the absence of meaningful change to the biggest tax raisers, this is unlikely to change. Perhaps most importantly though, what this Budget does do is enable the Chancellor to cut taxes ahead of the next election if he wishes to do so. Therefore in the long term the judgement could well be that this Budget was a political masterclass most of all.
Sir Keir Starmer’s response to the Chancellor’s statement was characterised by attempts to grapple with two key strategic problems of his leadership so far; how to respond to a newly spend-happy Conservative Party, and what to do with Rishi Sunak.
On Sunak, his team appears to have settled on painting the Chancellor as a camera hungry closeted right winger. Multiple jokes were delivered about Sunak’s social media presence and suggestions that the Chancellor was ‘itching’ to return to traditional Tory economics – Starmer joked that “one day we will be able to take our masks off and so will the Chancellor”.
But hoping that Sunak’s Conservative Party reverts to type, and does so in a way that is noticeable to ‘red wall’ voters, (many of whom will be celebrating the multiple regional giveaways in the budget) is a big risk for Labour’s leader. While Starmer challenged the Chancellor on social care, green investment, and inequality – even finding time to talk about the impact of Brexit on small businesses – the reality is that the headlines tomorrow will be about Sunak’s generosity, and Starmer likely knows this. As a consequence, much of his criticism of the Chancellor, whether on his extension to the furlough scheme, the UK Infrastructure Bank or corporation tax rises, was limited to the tactical issues of presentation and timing, rather than the strategic substance of his economic policies.