Budget 2021: Sunak ups Covid support but warns of need to 'rebuild fiscal resilience'

OBR warns departments could face "increasingly tight budgets" as chancellor pledges to rebuild "fiscal resilience”
Photo: Ian Davidson/Alamy Live News

The chancellor has warned of belt-tightening to come as the UK begins preparing its public finances, as he extended economic support for people and businesses affected by coronavirus.

Announcing a further £65bn in spending on measures to dampen the impact of the pandemic, Rishi Sunak said the bill for coronavirus support would reach £407bn by the end of the year.

And as he warned that “once we are on the way to recovery, we will need to begin fixing the public finances”, the Office for Budget Responsibility said departments could face "increasingly tight budgets" in the years to come.

The additional support Sunak announced in today’s statement include extensions to the furlough and self-employed support schemes to September, with the level of support tapering down in the final few months. The government will also provide £5bn in grants for high street and hospitalist companies, keep the £20-a-week uplift in Universal Credit payments announced last year in place for a further six months, and extend a cut to stamp duty and business rates.

As the support package will push borrowing up to the highest level since World War Two, Sunak said: “Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

“When crises come, we need to be able to act and we need the fiscal freedom to act: a freedom you only have if you start with the public finances in a good and strong place,” he added.

Sunak credited the decade of austerity under successive Conservative governments since 2021 with “rebuilding our fiscal resilience” to enable the current administration to respond to the Covid-19 crisis “as boldly as we have”.

However, it said it would not be "sensible" to set precise fiscal targets and deadlines to achieve them by at this point.

He said his fiscal decisions were based on three principles: that the state should not be borrowing to spend for ordinary public spending; that debt could not be allowed to keep rising; and to take advantage of lower interest rates to invest in capital projects that could contribute to economic growth.

To help meet these aims, the chancellor said corporation tax would rise to from 19% to 25% for the biggest businesses by the end of 2023. By the end of that period, the increase will raise £17bn a year, according to Treasury forecasts.

He will also freeze income tax thresholds and the higher-rate threshold from next year until 2026. The Treasury predicts the freeze, which amounts to a tax increase, will eventually raise £7bn a year.

A new Covid task force and extra funding for HM Revenue and Customs will also help to save money by rooting out fraud and tax avoidance, he said.

But the Office for Budget Responsibility has warned that departments should brace for possible budget cuts over the next few years, which could be announced in the Spending Review later this year.

At several points in his Budget statement, Sunak referred to the OBR having predicted higher than previously expected levels of growth for the UK in the coming months.

In today's report,  published alongside the budget, the OBR said planned RDEL spending – used to fund departments’ everyday activities and public services – had been revised down compared to its March 2020 forecast by between £14.3bn and £16.5bn a year over the next few years. Those figures include cuts to plans announced in this Budget of between £3.3bn and £3.9bn a year from 2022-23 to 2025-26, it said.

“This implies increasingly tight budgets for non-protected departments (i.e. those outside health, education, defence and overseas aid) going into the next Spending Review this autumn, especially given the government’s stated intention to return the aid budget to 0.7 per cent of national income ‘when the fiscal position allows’,” the OBR said.

The chancellor did not use the Budget to reverse plans for a freeze on pay rises for most civil servants, as unions had urged him to do.

Today's Budget also brought news that applications for the Levelling Up Fund, designed to drive regeneration in “left behind” areas by investing in local infrastructure, have now opened.

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Coronavirus Economics
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