PLMR Analysis: Autumn Budget and Spending Reveiw

The Chancellor started off by trying to strike a positive tone about the future, saying he was not drawing a line under Covid – and that we are certainly not at the end of the pandemic yet – but that he wants to create a higher wage, higher skills, higher productivity economy post Covid. With better-than-expected growth figures projected by the Office for Budget Responsibility, the Chancellor had some room to manoeuvre. He used it to deliver a big spending Budget, surpassing expectations to say that every Government Department will get a real terms rise in spending every year, and reforming the Universal Credit taper to help deal with a rising cost of living. As the Chancellor is a fiscal hawk, it seems this Budget has the fingerprints of a more spending friendly Prime Minister all over it. However, this could prove problematic politically going forward as this is moving away from the small-state and low-tax approach which a significant number of Conservative MPs yearn to go back to, and instead seems to continue the trajectory of high spending, even after the pandemic. Informal messages from some Conservative MPs are already peppered with the phrase “we are wearing Labour’s clothes”.

However, the Government will be emboldened by the plain fact that spending and investment is incredibly popular among the public. Austerity is no longer politically viable, especially if they want to keep Red Wall voters in line come the next election. With the Conservatives continuing to encroach on Labour’s natural territory, and indeed actually going further than them in some ways, the pressure will be on Labour to make clear what they stand for and what they can offer.

To try and show his commitment to fiscal responsibility, the Chancellor introduced new fiscal rules that the Government will have to abide by. Sunak also promised a Parliamentary vote on it, which could put Labour and other opposition parties in a tricky spot. He spoke about the benefits of Brexit in terms of being able to reform the tax system, and he devoted a chunk of his Budget to ensuring MPs and the country knew he ultimately wanted to lower taxes by the end of this Parliament (read ahead of the next General Election). He also made clear that, moving away from the Government’s response to the pandemic, there is a limit to what the state can do and the answer to every issue should not be Government or taxpayer intervention. This will be warmly welcomed by some Conservative backbenchers who feel the Government has been too activist and interventionist.

It’s worth pointing out that the biggest news from this Budget and Spending Review was announced weeks ago. With the Manifesto-breaking National Insurance rise to pay for health and social care already dealt with, the Chancellor avoided the backlash of a big set-piece tax rise today. It also shows the Government has calculated that people will stomach paying more taxes if it means it goes into public services like the NHS and deals with the backlog, which the Government really doesn’t want to become a “doorstep issue” at the time of the next election.

As ever the devil is in the detail and there are some areas which the Government could be exposed on. The Chancellor extended the commitment to reach the £20bn target for R&D by two years, which will lead some to question the Government’s commitment to becoming a “scientific superpower”. There was a lot of talk about how some spending was going back to 2010 levels, for example per pupil spending, but this does lead to the accusation that this is a decade without growth. With the Conservatives in power over the last decade, this shows the Government is very happy to move away from the Cameron/Osborne/May eras. There will also be some questions around the green agenda, and the timing and logic of cutting air passenger duty and fuel duty a week before COP26.

On Levelling Up – there wasn’t too much mention of the phrase itself but the Chancellor pointedly highlighted that Labour constituencies will also be benefitting from today’s announcements. This was to counter allegations that the Government is punishing Labour held areas. However, a lack of detail on Northern Powerhouse Rail and HS2 will lead some people to question the Government’s commitment to delivering these key Levelling Up projects.

Ultimately though, this isn’t really about Government by announcement or billions of pounds that most people will find intangible, this is about outcomes and whether voters feel that their lives are improving as a result of the Government’s decisions and action. With increases in cost of living and inflation, this may take some time to play out.

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What does this Budget mean for the public finances?

 

The higher-than-expected growth rates announced by the Office for Budget Responsibility (OBR) have given Sunak more room to manoeuvre than expected, with the long-term scarring effects of covid on the economy revised down by 1%. Although this doesn’t sound like much, GDP is the key driver of tax revenues, and means that the forecast for anticipated borrowing for the next 5 years is much lower. With that being said the Budget does mark a large and sustained increase in public spending, comprising a £25.0 billion rise in departmental resource spending and a £3.0 billion boost to universal credit, which is only partly offset by £6.7 billion saved by the temporary move from a triple to double lock for the state pension. In terms of how big the state is due to become over the next five years, Sunak’s announcements put the UK on a path to public spending reaching a whopping 41.6 per cent of GDP in 2026-27, the largest sustained share since the late 1970s.

To reassure his party, the Chancellor has blamed this increase on the damage inflicted by Covid, but also the need to level up the country. He has also sought to re-assert the Conservative’s reputation for fiscal rectitude by announcing two new rules, which together have been called the ‘New Charter For Budget Responsibility’. These mean that underlying public sector net debt must be falling as a percentage of GDP in normal times, and that everyday spending must be paid for through taxation, meaning the state can only borrow to invest.

Unsurprisingly, he announced that the Government was set to hit the very targets he had just written, and a cynic might view these rules as moving the fiscal goal posts for political expedience. Considering debt as a percentage of GDP is 10% higher than pre-pandemic levels, these targets can hardly be described as challenging.

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What does the Budget mean against the backdrop of rising inflation?

 

This Budget represents a significant economic stimulus, and perhaps suggests the Chancellor is determined to secure the recovery, even it does lead to increased inflation. This isn’t to say that rising prices isn’t a concern for the Chancellor, and he outlined the challenges posed by inflation at the very start of his Budget. However, he was keen to frame this issue as a global challenge, rather than anything “unique to this country”. By saying that rising prices are “impossible to address alone”, Sunak is trying to provide his Government with the cover needed to challenge any accusations from Labour of economic mismanagement. But with inflation (CPI) set to rise to 4% over the next year, the spectre of a cost-of-living crisis is a very real danger to the Government’s plans. It’s vital to remember as well that any sustained increase may force the Bank of England’s hand on interest rates, a development that would evaporate any additional wiggle room acquired through revised OBR forecasts.

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What does the Budget mean for COP26?

 

It has been well reported that the Chancellor and the Treasury are less enthusiastic than other parts of Government when it comes to climate change policy. Indeed, the word “COP26” was only mentioned once in the Chancellor’s entire speech, and even that was in passing.

However, the Chancellor did commit to providing £30 billion in funding which will go towards creating the new green industries of the future through innovation and infrastructure. The Chancellor also highlighted the UK’s record on green finance, and welcomed the fact that the UK was the third-largest issuer of Green Bonds in the world. The Budget also featured tax relief for business

who are investing in green technologies, along with other green projects such as wind farms in Teesside which are sure to please Red Wall MPs. The Chancellor also spoke about investing in nuclear energy, which will be music to the ears of some Conservative MPs who view it as the best way to reach Net Zero as opposed to interfering in people’s lives.

Throughout his speech, the Chancellor gave the distinct impression that he is only interested in Net Zero and climate change when he can tie it to jobs, innovation and investment, rather than for the sake of it. Critics will also point out that reducing air passenger duty and freezing fuel tax is at odds with the Government’s Net Zero ambitions. Even though COP26 is next week, and the Chancellor will be meeting his international counterparts there, it appears unlikely this Budget will have any real impact on the discussions.

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How has the Budget been received by the wider Conservative Party?

 

This Budget has been warmly received by almost all corners of the Conservative Party. Red wall MPs will be delighted by Sunak’s decision to allocate the first round of bids from the Levelling Up Fund. Those concerned about the Union will be pleased with the implications for the Barnett Formula, which will increase Scottish Government funding by an average of £4.6bn a year. There were even titbits for those on the free market wing of the party, with the fuel duty freeze going down particularly well with the likes of Steve Baker, who would have also have enjoyed Sunak’s channelling of Margaret Thatcher when he said, “this is not the Government’s money, its taxpayers money.”

Cameronites would have been thrilled with the Budget’s first ‘rabbit out of the hat’, where he announced that international aid spending will return to 0.7% in 2024/25. Finally, the Brexiteers will have no doubt cheered at the reformulation of alcohol and air passenger duty, something that was precluded by EU membership.

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View from Labour

 

Keir Starmer tested positive for Covid on the morning of the Budget, leaving Shadow Chancellor Rachel Reeves to respond. Reeves was critical of the Budget as not going far enough to tackle the cost of living crisis and repeatedly argued that the Government was ‘out of touch’ and not providing solutions. Reeves also frequently referred to Labour’s plans to tax large online companies such as Amazon, which would help the retail sector in particular.

Reeves argued this was a budget for ‘the bankers on short-haul flights sipping champagne’ rather than for working people, criticising tax cuts for banks and property speculators. Reeves also highlighted a lack of Government support for a VAT cut for gas and energy bills as a key missed opportunity. Reeves then argued that Labour would focus on climate investment, scrapping business rates and reversing the Government’s planned national insurance rise to help tackle the cost of living crisis.

Most notably, Reeves accused the Conservatives of being the party of “high-taxation and low growth” – a criticism from Labour that would have been unthinkable a few years ago but emblematic of how dramatically political norms have changed since 2019.

The smallprint:

 

· Red Book: Autumn Budget and Spending Review (here)

· Treasury Press Release: A stronger economy for the British people (here)

· Speech: from Rishi Sunak (here)

· Documents: full list (here)

 

 

Announcements

 

Employment

  • Pay freeze on public sector workers will be lifted, and public sector workers will see pay rises over the next three years.
  • Public sector pay will be decided by an independent pay commission, as before the pandemic.
  • National Minimum Wage will be increased to £9.50 an hour – a 6.6% increase which represents a pay rise worth over £1,000.

Health and Social Care

  • £3.9 billion for non-emergency tests and procedures. This includes money for at least 100 community diagnostic centres which can run clinical tests like MRIs, ultrasounds, and CT scans.
  • Other health funding includes a £2.1 billion investment in IT, £1.5 billion on new beds and upgrading 40 hospitals.
  • £5 billion for health R&D including money for Genomics England to create ‘Generation Genome,’ a national pilot of sequencing to detect rare diseases in 100,000 newborns.
  • 50,000 more nurses and 50 million more primary care appointments were pledged.
  • £4.8 billion in grant funds to local government for social care funding.

Transport

  • Heavy vehicle levy suspension extended until 2023, with vehicle excise duty frozen for heavy goods vehicles.
  • £21 billion on roads improvement – including £2.6 billion for local road upgrades and £5 billion for cycle and walking infrastructure.
  • £46 billion on rail improvements.
  • £5.7 billion invested in sustainable transport for the city regions to bring about ‘London-style’ transport. This will be spent on upgrading rail links, expanding tram links, and improving bus services. Benefiting from this is Greater Manchester (£1.07billion), West Yorkshire (£830 million), South Yorkshire (£570 million), West Midlands (£1.05 billion), Tees Valley (£310 million), West of England (£540 million) and Liverpool City Region (£710 million).
  • Fuel duty was frozen for the 12th consecutive year.

Education

  • £4.7 billion of new funding will be given to schools by 2024/25.
  • Per pupil funding will be restored to 2010 levels in real terms, equivalent to a cash increase for each pupil of over £1,500.
  • For children with special education needs, the amount the government spends will be tripled to create 30,000 new school places.
  • Almost £2billion will be given to schools and colleges to support educational recovery from Covid.
  • £3.8 billion will be provided over the Parliament for post-16 education which will quadruple the number of places on skills bootcamps, fund additional classroom hours for up to 100,000 16 to 19-year-olds studying T-levels and create 24,000 traineeships.
  • £830 million will be allocated to revitalising existing colleges in England.
  • £560 million will be used to fund a new adult numeracy programme, called ‘Multiply’.

Early Years

  • £300 million to set up a “Start 4 Life” programme.
  • £82 million to set up Family Hubs in 75 new council areas to support struggling families.
  • £150m used to train early years staff to support children’s development.
  • £170 million more to be provided over the next 3 years to early years providers.
  • £200 million will be given to the Supporting Families programme.
  • £200 million a year will continue the Holiday, Activity and Food programme.

Tax

  • Tonnage tax will be simplified and reformed, with companies who fly the UK merchant shipping flag to be rewarded.
  • Air Passenger Duty will be lowered for internal UK flights from April 2023.
  • New ultra-long haul flight air duty band to be introduced for flights over 5,500 miles.
  • Support for English airports to be extended for six months.
  • Annual £1m investment tax allowance for businesses extended to March 2023.
  • The Universal Credit taper was reduced from 63% to 55%, a tax cut worth £2 billion and leading to savings of £1,000 for average families. This change will be made no later than 1st December 2021.
  • Alcohol Duty will be simplified – the higher the alcohol percentage, the higher the duty.
  • Draft relief for pubs will enable a lower rate of duty on draft beer and cider, a cut of 5% – or 3 pence a pint. This will come into effect in April 2023.
  • The planned increase in duty for spirits, scotch and beer and cider will be cancelled, a tax cut worth £3 billion.

Business Rates

  • £750 million of investment incentives through a new green investment relief was introduced.
  • Business rate will be deferred for one year after business improvements or expansions, such as a hotel increasing its room capacity.
  • £4.6 billion over the next five years will be saved by businesses through cancellation of the multiplier tax.
  • 50% business rate discount for the retail, hospitality and leisure sectors was introduced (up to maximum of £110,000).
  • Overall, business rates were cut by £7 billion.

Innovation and Research & Development

  • R&D funding target of £22 billion will be maintained, increasing R&D as a percentage of GDP from 0.7% in 2018/19 to 1.1% by the end of this parliament.
  • Core science funding will be increased to £5.9 billion.
  • The government committed to meeting the full cost of aligning to Horizon Europe.
  • £800 million to go towards ARIA.
  • Innovate UK’s budget will be increased to £1 billion.
  • £30 billion will fund green industry innovation.
  • £1.4 billion will be used to establish a Global Britain Investment Fund.
  • Reform of the Business R&D tax relief scheme was proposed.
  • £150 million will be used to establish a regional investment network operating outside of the South East.

Crime

  • £355 million will be spent in the Budget to tackle crime, with £50 million of this going towards preventing neighbourhood crimes through the Safer Streets Fund – including improved street lighting and better CCTV.
  • The Crown Prosecution Service will get £80 million to focus on improving the response to rape and sexual violence cases. Scotland and Northern Ireland are to get Barnett consequential spending.
  • £1 billion will be spent to tackle the courts backlog.
  • £3.8 billion will be spent over the next three years for a prison building programme.

Housing

  • £11.5 billion to build 180,000 new homes over the next 3 years.
  • £1.8 billion regeneration investment for brownfield development of land the equivalent size of 2,000 football pitches in towns and cities across England.
  • £5 billion to remove unsafe cladding, partly funded by the residential property developers’ tax (for developers with profits of over £25 million at a rate of 4%).
  • £640 million a year to tackle rough sleeping and homelessness.

Communities

  • £500 million will be used to create a household support scheme for those on welfare.
  • £560 million to fund youth services, including building 300 youth clubs in deprived areas.
  • Over £200 million to refurbish football pitches and create new pocket parks.

Culture and Heritage

  • Museums & Galleries will receive £800 million to encourage the development of cultural hotspots.
  • £2 million will be used to create a Beatles-themed attraction in Liverpool.
  • To support theatres, orchestras, museums & galleries: tax reliefs for all these sectors will be doubled until April 2023. This is worth a quarter of a billion pounds.

The Union

  • £130 million to support small and medium sized businesses in Wales with similar schemes worth £150 million for Scottish business and £70 million for Northern Irish businesses.
  • Through the Levelling Up Fund – £170 million will be invested in Scotland, £120 million in Wales, and £50 million in Northern Ireland. This goes beyond Barnett shares.
  • Overall, funding has increased by £4.6 billion for the Scottish Government, £2.5 billion for the Welsh Government and £1.6 billion for the Northern Irish Executive.

Veterans

  • A UK-wide Veterans’ Health Innovation Fund will get £5 million to go towards treatments for former members of the armed forces who have suffered injuries or experience mental health challenges and post-traumatic stress disorder (PTSD).

International Development

  • The government will return to spending 0.7% of GDP on international aid by 2024/25 if fiscal rules are met.

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