A Brief Evaluation of Budget 2021
On Wednesday, Chancellor Rishi Sunak announced his plans to the UK parliament, setting out the policies that would follow according to Budget 2021. Below, I have provided a brief outline and evaluation of the crucial points.
The Furlough Scheme
First introduced in March 2021, the Furlough Scheme supported employers who couldn’t maintain their current workforce due to operations affected by the coronavirus. After its initial success of “effectively protecting millions of people’s jobs and incomes”, Sunak declared that furlough support would be extended till the end of September 2021.
Statistically, over 7.5 million jobs have been recovered by the scheme, with a cost around £8bn a month. The system functions as the government pay 80% of wages up to £2500 a month, in return avoiding a surge in unemployment.
This investment will come as a relief to many employers who avoid the financial and emotional costs associated with firing and then having to rehire workers. More subtly, furloughed workers limit the damage of the recession by maintaining the flow of money. The hope is that when the “Covid-19 economic shutdown” is at an end, the economy can bounce back, and these workers can go back to a productive business.
However, the Furlough scheme raises fears over disincentives and the potential for fraud. Given the scale of the scheme, firms could fraudulently claim benefits when the workers are still operational.
In a bid to tackle this, a budget of £100m will be allocated to “set up a new HMRC taskforce of around 1,000 investigators as well as new measures, and new investment in HMRC, to clamp down on tax avoidance and evasion.” Furthermore, such generous schemes also provide incentive to claim benefits rather than restructuring business to the rapidly changing nature of the economy.
Covid-19
Many NHS doctors and UK citizens were dismayed to hear that an extra £1.65 billion cash injection would be seen to ensure the Covid-19 vaccination continued to be a success. Although there is no doubt that this investment is a necessity, they are fuelled by large government debt.
The latest data shows that the UK government borrowed £8.8bn in January, which was the highest January figure since monthly records began in 1993. These rises in debt need to be financed, in the case of the UK through not only government bonds but a spend now, tax later scheme.
Other influential changes announced by the Chancellor included the additional £28 million for vaccine testing, clinical trials and to improve the UK’s ability to rapidly acquire samples of new variants of COVID-19.
Another smaller, yet imperative investment is the £22 million allocated to the study of vaccines. This will also fund the world’s first study evaluating the success of a third dose of vaccine to develop the response against current and future variants of COVID-19.
Tax
By far the two most controversial decisions came into play upon the announcement of changes to tax. Among his revenue-raising measures at the budget, the Chancellor announced deviations to income tax. These included the personal allowance frozen at £12,570 until 2025/26 as well as the threshold for higher rate income frozen at £50,270 over the 4 to 5 years.
The unpopular move, informally described as “stealth tax”, has gained publicity for dragging people into paying higher income-tax rates or inheritance tax. Fiscal drag is the formal term for this policy and can be defined as “the deflationary effect of a progressive taxation system on a country’s economy”.
According to the Office of Budget Management (OBR), this change will cause 1.3 million more people to pay taxes and 1 million more will pay in the higher tax bracket. Such extreme measures to tackle government borrowing has not been seen since the Second World War.
In Sunak’s words “this policy does remove the incremental benefit created had thresholds continued to increase with inflation”. While it is understandable why he commends the policy for being “progressive and fair”, tax evasion and fraudulent schemes will be ever the most present.
The most striking figure, came for the richest 20% of households, which studies predict will end up adding 15 times more than those on the lowest incomes. Again, this provides richer households with the incentive to avoid this through illegal activities, hence Mr Sunak’s £100m task force.
The second major decision was the stark rise in corporation tax, which will rise to 25% in 2023. Despite protecting smaller businesses, the policy will mean firms are facing the biggest tax burden since the 1960’s.
The Chancellor justified his decision, stating “I made those choices specifically because I wanted to protect working people from increasing in their tax rates”. He also stressed that the UK would still have the lowest corporation tax rate in the G7, adding he had formulated a scheme in which both fiscal responsibility and the need to stay competitive would be balanced.
Funding Economic Growth
Mr Sunak also announced an extension of the Universal Credit uplift. The scheme introduced at the start of the pandemic was extended until September as working tax credit claimants will be afforded the equivalent of a one-off £500 payment.
However, a survey with over 6000 claimants begged to differ from the Chancellor’s goal of “getting people into decent, well-paid jobs”. The results found that 60% of new benefit claimants and 43% of existing claimants experience a drop in their income which they weren’t able to manage by simply reducing their spending.
As the economic impact of the pandemic softens, the need to maintain the £20 uplift as a permanent measure will prove to be vital. If not, it is likely that the system will continue to perpetuate poverty.
It was also made clear that “the cut in stamp duty… has helped hundreds of thousands of people buy a home and supported the economy at a critical time”. Consequently, the £500,000nil rate band was extended to the end of June 2021.
The move will come as a relief to many home buyers who were left scrambling to complete their transactions before the deadline of March 31. Along with this, a new scheme will see the government guarantee mortgages for homebuyers who can raise deposits of 5%.
A large number of lenders including HSBC, Barclays, Santander, NatWest and Lloyds will be offering these 95% mortgages in the following month. This was with the underlying goal of turning “generation rent into generation buy”.
Conclusion: Taking a Wider Perspective
In summary, the UK Budget is a spend now and tax later affair. The government decided to dedicate a great deal of the Budget, in the following 2 years, to try and kick start the economy. In the medium-term, this means paying back the hole in the public finances with large tax increases on both companies and on households.
This article merely covers the surface of Budget 2021 as there have been large changes to pensions, wages, duty taxes etc. For some, the changes may appear as an effort to protect the interest of the privileged through the seemingly small increases in corporation tax. Conservatives on the other hand, would argue that Sunak continues to address the public needs to an appropriatly, possibly even too harshly considering the statistics on tax thresholds.
To review the policy changes in more depth, visit: https://www.gov.uk/government/news/budget-2021-what-you-need-to-know
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Dinil Wanni Arachchige
