Page 2 - Budget Newsletter 2021

29 October 2021

BUDGET NEWSLETTER

THE BUDGET BACKGROUND

Less than eight months ago, Rishi Sunak presented a Budget that was anticipating the ending of
the pandemic’s impact on the UK economy. He announced extensions and end dates for the
furlough scheme, the self-employed income support scheme, reduced VAT for hospitality and the
£20 a week uplift to Universal Credit. To finance some of that expenditure, the Chancellor also
revealed a 6% increase in corporation tax, deferred until 2023.

That March 2021 Budget should have emerged in Autumn 2020, but, for a second successive year, political pragmatism
meant autumn was moved to spring. A few months ago it looked as if there would be a similar deferral for a third year,
but when the social care/NHS package was announced early in September, an Autumn Budget date was confirmed.
Some commentators felt that, with that package, the Chancellor had already presented at least a mini-Budget given the
£14bn a year increases in National Insurance Contributions (NICs) and dividend taxation that were introduced.

It is a moot point whether the UK is in the position today that the Chancellor was looking forward to in early March.
The pandemic has waned on one important measure – daily deaths have about halved over the last eight months –
but on another measure conditions have worsened – daily case rates are 550% higher than the level of early March. It
is a similar situation with the UK economy:

• In March, the Office for Budget Responsibility (OBR) forecast UK economic growth of 4.0%. While the first six
months of 2021 suggested this would be easily beaten, more recent data has been disappointing as the Delta
variant and supply blockages have applied the brakes. The OBR now projects growth for 2021 will be 6.5% and has
marked down 2022 growth from 7.3% to 6.0%.

• CPI Inflation in March 2021 was 0.7%, which the OBR thought would rise to 1.8% in 2022. The latest CPI (for
September) is 3.1%, while the OBR now believes inflation will rise to 4% by the end of next year. The new chief
economist at the Bank of England recently told the FT that he saw inflation reaching around 5% early in 2022.
Higher inflation means greater revaluation costs for the Government on index-linked gilts – already becoming an
issue – and, potentially, higher interest rates on conventional bonds.

• Borrowing in the first six months of the year was over £43bn below the OBR’s March forecast, thanks to better
than expected inflows of income tax, NICs and corporation tax and lower than projected Government spending.
However, the debt pile has now accumulated to over £2,200bn, which explains why Mr Sunak is so concerned
about any rise in interest rates. Although the Bank of England base rate has not moved from 0.1% at the start of
the pandemic, the yield on 10-year Government bonds immediately before the Budget was back to the levels of
mid-2019. Earlier in October, the Governor of the Bank of England, Andrew Bailey, had said the Bank “will have to
act’ to reduce inflationary pressures.

Faced with this backdrop following on from his manifesto-breaking tax hikes of last month, the Chancellor spent the
weekend before the Budget revealing £26 billion of spending in 11 separate announcements. It seemed that he might
have nothing left to say on Budget Day, but that was not the quite case. While there were no tax increases of any
significance, Mr Sunak did reveal a range of spending measures and reforms to help business. The proposals of most
interest were:

• There will be no changes to the main income tax allowances or tax bands (excluding Scotland, which has its
Budget on 9 December), although dividend tax rates will rise by 1.25 percentage points from 2022/23.

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