Tax burden to reach 70-year high as Sunak rebuilds after Covid-19

The tax burden will reach its highest level since the early 1950s as Rishi Sunak boosts public spending and takes action to address the rising cost of living.

The Chancellor reaped the benefits of a stronger-than-expected recovery from the economic hit of Covid-19, using his Budget to set out increases in departmental spending and help for people on low incomes.

Mr Sunak pledged a major increase in Whitehall budgets, tax cuts for businesses, and investment to create a “new economy” based on high skills and wages following the pandemic.

But the moves come on top of previously-announced increases in corporate and personal taxation, which the Office for Budget Responsibility (OBR) said would leave the overall tax burden at its highest since the final period of Clement Attlee’s post-war administration 70 years ago.

Key announcements in the Budget include:

– A £2.2 billion package of Universal Credit reforms to allow claimants to keep more of the benefit if they earn more from work.

– Some £7 billion worth of cuts to business rates following a review into the property tax, with the cancellation of next year’s increase in the rates multiplier and a 50% cut to next year’s rates for most retail, hospitality and leisure businesses.

– A major overhaul of alcohol taxation, including cutting the cost of Champagne and prosecco, which Mr Sunak said are “no longer the preserve of wealthy elites” from 2023.

– Pubs will be helped with a new lower rate of duty on draught products, knocking around 3p off a pint as part of the reforms.

– Previously planned rises in alcohol and fuel duties will also be scrapped.

– A cut in the surcharge levied on bank profits from 8% to 3%.

– Flights between airports in England, Scotland, Wales and Northern Ireland will be subject to a new lower rate of Air Passenger Duty from April 2023.

– Whitehall departments will receive a real terms rise in funding as part of the Spending Review, the Chancellor said, amounting to £150 billion by 2024/25.

Mr Sunak told MPs: “Employment is up. Investment is growing. Public services are improving. The public finances are stabilising. And wages are rising.”

He promised “help for working families with the cost of living”, with the OBR expecting CPI inflation to reach 4.4% but warning it could go further and hit “the highest rate seen in the UK for three decades”.

The Chancellor was given some leeway for greater spending as a result of an improved economic outlook, with the OBR predicting the economy will return to its pre-Covid level at the turn of the year.

It also reduced the estimate of the long-term “scarring” caused by the pandemic from 3% of gross domestic product, a measure of the size of the economy, to 2%.

The economy is forecast to grow 6.5% this year instead of the 4% expected in March.

But Mr Sunak acknowledged the problems of rising inflation, blaming it on the global reopening of economies following the pandemic.

He promised further action to address strained supply chains with tax breaks for HGVs and investment in lorry parks.

The OBR said international supply-chain bottlenecks had been “exacerbated by changes in the migration and trading regimes following Brexit” in the UK.

The Budget follows the Government’s decision to increase National Insurance contributions by 1.25 percentage points from April to help fund the NHS and social care and previously announced hikes in corporation tax rates.

The OBR said the changes announced by Mr Sunak amounted to a “significant discretionary increase in both the tax burden and the size of the post-pandemic state”.

Mr Sunak had raised taxes by more in his two 2021 Budgets than in any single year since 1993 in the aftermath of Black Wednesday.

The combination of stronger growth and Mr Sunak’s policy decisions raise the overall tax burden from 33.5% of GDP in to 36.2% by 2026-27.

Mr Sunak said: “Taxes are rising to their highest level as a percentage of GDP since the 1950s.

“I don’t like it, but I cannot apologise for it, it’s the result of the unprecedented crisis we faced and the extraordinary action we took in response.”

But in an effort to reassure nervous Conservatives, he added: “By the end of this Parliament, I want taxes to be going down not up.”

It was understood that he later sought to further reassure those on the 1922 Committee of Tory backbenchers by telling them he wants to use “every marginal pound” in the future to lower taxes rather than increase spending.

The Chancellor is on course to meet new “fiscal rules” for underlying debt to be falling by 2024-25 and to only borrow for investment, rather than day-to-day spending.

With the economy growing and unemployment forecast to be lower than expected in March, the rising cost of living is the biggest headache facing Mr Sunak.

As well as previously-announced increases in minimum wage rates, Mr Sunak promised changes by December 1 to the amount of extra earnings Universal Credit claimants can keep.

The move follows a widely-condemned £20-a-week cut in the benefit earlier in October.

Mr Sunak dramatically reduced the UC “taper”, meaning that, instead of losing 63p of UC for every £1 earned above the work allowance, the amount will be cut to 55p.

The amount people can earn before starting to lose the benefit will also increase by £500.

“This is a tax cut next year worth over £2 billion,” he said.

“Nearly two million families will keep, on average, an extra £1,000 a year.”

But Labour said the £20 weekly cut affected six million families.

Shadow chancellor Rachel Reeves said: “As he hits working people with the highest sustained tax burden in peacetime, he’s giving a tax cut to bankers who like to take short-haul flights while sipping Champagne.

“After taking £6 billion out of the pockets of some of the poorest people in this country, he is expecting them to cheer today at being given £2 billion to compensate.”

Labour leader Sir Keir Starmer, who missed the Budget after testing positive for coronavirus, accused the Chancellor of doing “nothing about the cost-of-living crisis”.

Tony Danker, director-general of the Confederation of British Industry, welcomed “several positive steps forward” but said: “This Budget alone won’t seize the moment and transform the UK economy for a post-Brexit post-Covid world.

“Businesses remain in a high tax, low productivity economy with concerns about inflation.”