The tax burden will increase to its highest level for more than 50 years after Chancellor Rishi Sunak set out his plans to begin repairing the nation’s finances after the coronavirus crisis.
Mr Sunak used his Budget to extend the furlough scheme and Universal Credit increase as part of a £65 billion lifeline for the economy as it emerges from the pandemic.
But taxes on business profits are set to be hiked from 2023, while income tax thresholds will be frozen meaning more people will be dragged into paying.
The Office for Budget Responsibility (OBR) said raising the headline corporation tax rate, freezing personal tax allowances and thresholds, and taking around £4 billion a year more off annual departmental spending plans would raising a total of £31.8 billion in 2025-26.
The measures announced in the Budget increase the tax burden from 34% to 35% of gross domestic product (GDP) – a measure of the size of the economy – in 2025-26, “its highest level since Roy Jenkins was chancellor in the late 1960s”.
Mr Sunak said the total package of measures – including those already announced – to support the economy amounted to £407 billion.
But he said the unprecedented spending could not continue and he had to be “honest” about putting the nation’s finances back on a sustainable footing.
The point at which people begin paying income tax will increase by £70 to £12,570 in April, but will be maintained at that level until April 2026, meaning more people will be dragged into paying tax as wages increase.
The 40p rate threshold will increase by £270 to £50,270 and then be frozen.
Mr Sunak said “nobody’s take-home pay will be less than it is now, as a result of this policy”, but he acknowledged it “does remove the incremental benefit created had thresholds continued to increase with inflation”.
Corporation tax will increase from 19% to 25% in 2023.
But a new “small profits rate” will maintain the 19% rate for firms with profits of £50,000 and there will be a taper above £50,000 so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate – around 10% of firms.
There will be a “super deduction” for companies when they invest, reducing their tax bill by 130% of the cost.
While economists have largely agreed that immediate measures to repair the nation’s finances are not needed while the impact of the coronavirus crisis is still being felt, the need for medium-term action was underlined by the OBR forecasts.
Mr Sunak said this year borrowing was £355 billion, 17% of national income – the highest level since the Second World War.
Next year it is forecast to be £234 billion, 10.3% of GDP, “an amount so large it has only one rival in recent history – this year”.
Mr Sunak added: “Without corrective action, borrowing would continue at very high levels, leaving underlying debt rising indefinitely.”
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.
Underlying debt rises from 88.8% of GDP this year to 93.8% next year. It then peaks at 97.1% in 2023-24, before stabilising and falling slightly to 97% and 96.8% in the final two years of the forecast.
The Chancellor said the recovery from the economic damage caused by coronavirus will be “swifter and more sustained” than previously thought as a result of the vaccine rollout.
But he warned it would take “a long time” to rebuild and pledged to do “whatever it takes” to support people.
The OBR expects the economy to return to its pre-Covid level by the middle of next year, six months earlier than it previously thought, but Mr Sunak acknowledged that “coronavirus has done and is still doing profound damage”.
Growth next year is expected to be 7.3%, up from 6.6%, but the OBR slashed its GDP forecast for every other year until 2025, including a cut for this year to 4% from the 5.5% growth previously pencilled in.
Unemployment caused by the pandemic is forecast to be lower than expected, peaking at 6.5%, down from 11.9% predicted last July.
In his Budget the Chancellor:
– Extended the stamp duty holiday for properties less than £500,000 until the end of June, then a new £250,000 threshold will apply until the end of September before the £125,000 starting point is reintroduced.
– Confirmed the extension of the furlough scheme until the end of September, although employers will be expected to make a contribution from July.
– Extended the 5% reduced rate of VAT for the tourism and hospitality sector to the end of September, with an interim rate of 12.5% for another six months after that.
– Continued the business rates holiday for the retail, hospitality and leisure sectors until the end of June, with a two-thirds discount for the remaining nine months of the year.
– Announced the temporary £20-a-week increase in Universal Credit payments will continue for a further six months.
– Set out a new Recovery Loan Scheme to replace previous coronavirus loan packages, allowing businesses of any size to apply for loans from £25,000 up to £10 million through to the end of the year, with the Government providing lenders with an 80% guarantee.
– Froze all alcohol duties for the second year in a row and scrapped a planned increase in fuel duty.
– Announced eight new freeports in England, special economic zones with rules making it cheaper and easier to do business.
– Revealed a new “economic campus” for the Treasury and other Whitehall departments in Darlington.
Mr Sunak told MPs: “An important moment is upon us. A moment of challenge and of change. Of difficulties, yes, but of possibilities too.
“This is a Budget that meets that moment.”
Paul Johnson, director of the Institute for Fiscal Studies think tank, said “we are in a new phase of UK economic history” and “taxes (are) likely to be at their highest sustained level”.
Labour leader Sir Keir Starmer said the Budget was a “quick fix, papering over the cracks” but “didn’t even attempt to rebuild the foundations of our economy or to secure the country’s long-term prosperity”.