Sunak left himself wriggle room for tax cuts before the next election

Rishi Sunak’s Budget contained more surprises than economists had expected, even with a host of measures having been announced ahead of time.

A sharper-than-hoped-for recovery from the pandemic’s assault on the economy increased the amount of borrowing available to the chancellor within his new fiscal rules, meaning that he could afford some rabbits to pull out of his sliders.

As the UK’s largest economic think tanks started to crunch the key numbers, their early assessment was plain: this was not an austerity budget, but neither was it a huge fiscal boost. There is also trouble ahead, with real wage growth set to be eaten up by higher inflation. And this very high-tax chancellor will struggle to sell himself as a traditional fiscal conservative for now.

“Taking his March and October Budgets together, the chancellor has raised taxes by more this year than in any single year since Norman Lamont and Ken Clarke’s two 1993 Budgets in the aftermath of Black Wednesday,” the Office for Budget Responsibility (OBR) noted.

Yet Sunak still held on to around half of the windfall granted by higher GDP growth.

At first glance, that was just enough to allow the chancellor to strike a balance between a budget that was stingy in some areas – to please backbenchers aggravated by tax rises that were announced ahead of the Tory party conference this autumn – and one that offered enough detail and giveaways to wrong-foot Labour.

The official opposition always has a tough time when it comes to responding, largely blind, to the tax and spending plans of a chancellor, but this is made more difficult if it does not have much detailed policy of its own to form a counter-offer to the public.

That was a political calculation Mr Sunak’s team appeared to have made on business rates. Labour is yet to lay out exactly what it would replace the taxes on bricks-and-mortar companies with. Meanwhile, the chancellor offered a 50 per cent reduction in business rates for pubs and restaurants next year, along with plans to review these rates every three years. In a nutshell: it was not perfect, but it was something.

The same rubric was true of the changes to universal credit. The taper rate – the amount that is taken away for each £1 earned over a certain threshold – was lowered by 8 per cent. This represents a significant win for a host of organisations, including the Joseph Rowntree Foundation, which had campaigned for changes to the taper.

The measure will be implemented not next year, but within weeks, the chancellor said. It will not offer anything to the roughly one in five people on universal credit who are unable to work. They will not see any of the gains from a higher national living wage, either.

But, again, the chancellor offered something immediate, using pace to his advantage. The shift on the taper was a challenge to Labour by being swift, as well as appeasing some on the Tory backbenches who had opposed the £20 cut, while at the same time avoiding a direct U-turn.

Nimble footwork can’t avoid difficult longer-term problems, however. The biggest single problem facing the chancellor, in both economic and political terms, is a cost-of-living crunch that the OBR’s inflation projections suggest is going to last for years. Supply-chain disruption arising from the pandemic and Brexit have combined with higher energy costs to make for a host of price pressures.

This means that while the chancellor’s maxim of making work pay was a key line of logic so far, it will not bear much scrutiny going forward. A little bit of jam today cannot make up for a bread shortage tomorrow. The chancellor needs real-terms increases in wages right up until the next election for that to hold, and it’s not clear where they will come from.

Still, he kept some of his powder dry by not spending all of the borrowing room allowed by his fiscal rules after accounting for better GDP growth. The upshot may be some fiscal conservatism after all: leaving space to allow for tax cuts ahead of the next election.