Rishi Sunak has been warned that his plans to address the UK’s battered public finances following the coronavirus crisis “do not look deliverable” without “considerable pain”.
Paul Johnson, director of the Institute for Fiscal Studies (IFS) think tank, said it remained to be seen after Wednesday’s Budget how the Chancellor would fix the problem.
He said Mr Sunak’s plans left him looking more like Scrooge than Santa, with fiscal tightening of almost £50 billion relative to his pre-pandemic plans of March 2020.
Mr Johnson also said two big tax increases announced on Wednesday were “screeching U-turns on Conservative policy over the last decade” with a rise in corporation tax of “historic proportions”.
Corporation tax will increase from 19% to 25% in 2023, raising £17.2 billion in 2025-26, although only firms with profits of £250,000 or more will pay the full rate, Mr Sunak said.
There will also be a “super deduction” for companies when they invest, reducing their tax bill by 130% of the cost.
Mr Sunak said borrowing this year was £355 billion, 17% of national income – the highest level since the Second World War – while next year it is forecast to be £234 billion, 10.3% of gross domestic product (GDP).
The Budget measures will see borrowing fall to 4.5% of GDP in 2022-23, 3.5% in 2023-24, then 2.9% and 2.8% in the following two years.
But in a “tale of two budgets”, as Mr Johnson described it, the Chancellor said he would extend the furlough scheme and Universal Credit increase as part of a £65 billion lifeline for the economy.
However, income tax thresholds will be frozen, meaning more than a million extra people will be dragged into paying it as wages increase.
Inheritance tax thresholds, the pensions lifetime allowance, and the annual exempt amount in capital gains tax will also be maintained at current levels until April 2026.
Mr Sunak earlier defended the plans to freeze income tax thresholds, describing it as a “progressive” form of taxation.
He told Sky News: “Freezing personal tax thresholds is a progressive way to raise money. I think crucially what people need to understand is that no one’s take-home pay that they have today is affected or lowered by this policy.
“What it does do is remove the incremental benefit that they might have experienced in future as inflation fed through to their wages.
“Also crucially, those on higher incomes are affected more by this policy – it is a very progressive policy and that is something that has been noted by independent think tanks that are respected, like the IFS and others who have made the point that the richest 20% of households, for example, will end up contributing I think 15 times more than those on the lowest incomes.
“That is why this is a fair way to help solve the problems that we need to.”
Torsten Bell, chief executive of the Resolution Foundation economic think tank, said the Budget marked a “very big change around” in the Tory approach to taxation.
He said Mr Sunak’s big rise in corporation tax raised “serious questions both on where investment is going to come from in the years ahead – remember, it’s not just this pandemic we are going through, it’s Brexit plus this at the same time”.
“Do Tory MPs agree with the Chancellor that the bit of Conservatism you need to hold on to is fiscal rectitude, not being low tax, or would they rather be low tax and just borrow lots of money?”
Business groups had not complained too strongly because the tax rises were still some way off, he said, but “I would be amazed if in two years the CBI is not saying ‘it’s absolutely bonkers that we are raising corporation tax to 25%’”.
Office for Budget Responsibility (OBR) chairman Richard Hughes said the economic forecasts had been influenced by optimism surrounding the assessment of the state of the coronavirus pandemic.
“One of the unique things about the experience of doing forecasting recently is that we have to spend a lot of time talking to epidemiologists because they are the ones that can actually tell us what is going to happen with the economy more then you learn from talking to economists these days,” he told the Resolution Foundation event.
“They have got progressively more optimistic about the outlook, which has allowed us to be progressively more optimistic ourselves about the outlook for reopening the economy.”
Mr Sunak told MPs the total package of measures to support the economy – including those already announced – amounted to £407 billion, but warned the unprecedented spending could not continue.
The plans announced on Wednesday increase the tax burden from 34% to 35% of GDP – a measure of the size of the economy – in 2025-26, “its highest level since Roy Jenkins was chancellor in the late 1960s”, according to the OBR.
Budget documents revealed that there is a planned cut of £30 billion in day-to-day spending at the Department for Health and Social Care from April of this year, falling from £199.2 billion to £169.1 billion.
Labour leader Sir Keir Starmer said people would be “pretty astonished to know that the day-to-day funding for the NHS is being cut in yesterday’s Budget, hidden in that Budget was that cut”.
Speaking at the Royal Derby Hospital, which he said was “still struggling with Covid cases”, he said: “What’s coming next is the backlog of cases – 4.5 million people on waiting lists, understandably not been dealt with in the last year, so the NHS is going to have a really hard year and I think most people will be pretty astonished that the funding is being cut.”
Prime Minister Boris Johnson insisted on a visit to Teesport, Middlesbrough, that the Government had already invested “huge quantities” into health and social care throughout the coronavirus pandemic when asked what the sector’s workers had to do to get a pay rise or investment.
“About £52 billion went into the NHS just to help cope with the pandemic, £1.5 billion into social care, and £35 billion to support local councils in all sorts of ways,” he said.
Pressed on why there was no pay rise for health and social care workers in the Budget, Mr Johnson said: “A lot of these are obviously in the private sector, the care home workers.
“What we’ve done is had record increases in the living wage, and again the living wage will be going up, which will be supported by the Government, again in April. Our debt to those workers is massive.”