Rishi Sunak’s Budget is lacklustre and short-sighted

Fiona Townsley

October 29, 2021

Even after the budget leaks, there was still more to disappoint with on the day. The Chancellor, Rishi Sunak, has continued his tax and spend policies, making it even clearer that the ‘high wage, high productivity’ economy that the Government speaks of is merely a marketing strategy that they have little chance of making a reality.

Sunak prides himself on being a chancellor of low taxation – however, under his tenure, the tax to GDP ratio will soon reach its highest level since 1951. Individuals will be significantly worse off due to the combination of the health and social care levy, which was announced earlier this year, and the frozen NIC and income tax bands, which increases the tax burden for everyone.

These significant changes will be eclipsed by business tax increases. Corporation tax will increase from 19 percent to 25 percent and simultaneously the Annual Investment allowance will reduce to a fifth of its current level and the super-deduction will be abolished. This will result in an increasingly uncompetitive and unattractive landscape for business operations. Overall these tax changes will hinder individuals and businesses and stunt economic growth.

Sunak’s budget results in public spending reaching 41.6 percent of GDP in 2024-2027, almost 2 percentage points higher than in 2019-2020. This £150bn spending plan over the remainder of this Parliament consists of scheme after scheme of frivolous spending. While Sunak states ‘today’s budget confirms it: the Conservatives are the real party of public services’, he is merely pumping money into broken systems in the hope of miraculous improvement rather than committing to any real reform. This is the case with the £500m early years spending which has been granted without any commitment to address the subsidies and regulations which cause the high cost of childcare. This spending will do nothing to fix the faults of the systems and also have the effect of driving up inflation.

The 6.6 percent increase to the national living wage will make the UK’s minimum wage one of the highest in the world. This policy will distort the labour market, putting pressure on businesses still recovering from the pandemic. These businesses will no longer be able to afford to employ as many people resulting in higher rates of unemployment and fewer hours. While the economy is showing signs of recovery, it is not yet robust enough to withstand this increase in the minimum wages.

This budget’s rise in taxation and increase in living wage will only worsen cost of living issues. The OBR expects inflation to average around 4 percent in 2022, perhaps reaching as high as 5 percent. This inflation will increase the cost of living for those already burdened with higher tax rates and will wipe out two-thirds of the increase to minimum wage, largely negating the policy. Due to rises in both prices and taxes, the IFS report that millions could be worse off in the short term. Inflation is likely to exceed increases to benefits and wages, resulting in lower disposable income.

There are, however, some positives within the budget. An 8 percent reduction in the Universal Credit taper rate has been announced, meaning those above the work allowance lose only 55p for every pound earned rather than 63p. Similarly, changes to alcohol duty to be based on the percentage of alcohol content is reform that is welcomed and a policy that the ASI have previously suggested. However these policies are simply a small plaster on a much larger wound.

This policy of high taxation, high spending is premature. The economy, while recovering from the pandemic, is not stable enough to adapt to these changes. This budget should have encouraged businesses to grow and innovate post pandemic and instead the budget is taking them out at the knees. While Rishi’s high spending during the pandemic was justified by the crisis situation, there is now no excuse.


Written by Fiona Townsley

Fiona Townsley is a Research Associate at the Adam Smith Institute.

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