Sunak’s spending review sets course for pre-election tax cuts

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Rishi Sunak has been in firefighter mode for much of his time as chancellor due to the coronavirus crisis, but Wednesday’s budget should give him the opportunity to try to set the agenda.

With the end of the government’s emergency support programs for households and businesses in the context of the Covid-19 pandemic, Sunak will present its three-year spending review for departments in Whitehall alongside the budget.

This should allow him to focus on the Conservative Party’s priorities for the period leading up to the next general election and here are five key themes to watch out for.

1. Improved economic and budgetary prospects

The UK economy has performed much stronger than expected at the time of Sunak’s last budget in March, so the UK fiscal watchdog will update its forecast for the economy and public finances.

The Office for Budget Responsibility is expected to say the UK is experiencing the fastest growth in gross domestic product in nearly 50 years in 2021 as it rebounds from the pandemic. The OBR growth forecast for this year is expected to be revised up from 4% to just over 6%.

With stronger growth, public finances should be better. Instead of a public loan of £ 234bn in 2021-2022, as the OBR predicted in March, the Institute for Fiscal Studies think tank expects £ 180bn. It’s still a huge amount, but well below the £ 320bn recorded in 2020-2021.

The most important judgment the OBR must make is how much persistent economic damage, or “scarring”, it expects to result from the pandemic. In March, he thought it would represent 3% of national income and is likely to lower that estimate slightly in his new forecast, slightly increasing the medium-term trajectory of GDP growth.

Sunak should be able to say he is on track to present a current balanced budget, with taxes covering daily public spending, by the middle of the decade, and a declining public debt burden. It will define these goals as its two most important fiscal rules in the budget.

2. Focus on pre-election tax cuts

The Chancellor’s downside of polishing his credentials as a fiscal conservative, seeking a balanced current budget, is that he had to announce some of the biggest tax increases in the Kingdom’s post-war history. United to cover the long-term costs of the pandemic.

Sunak said in his March budget that the corporate tax rate would drop from 19% to 25% in 2023 because he also froze income tax allowances and thresholds.

And in September, the government presented plans to increase national insurance contributions by 1.25 percentage points of salary for employers and employees from April, to increase funding for the NHS and social services.

But Boris Johnson and Sunak have openly expressed their wish to ultimately cut taxes and the Chancellor has already taken steps to facilitate that.

Sunak asked the OBR to close its budget forecast on September 24, which means it ignored revisions to official GDP data that would have improved the economic outlook.

The Chancellor is therefore hoping for a new round of upward revisions to the OBR’s forecasts on GDP growth and public finances in the spring, which would increase her chances of having a windfall of tax cuts before a general election in 2023 or 2024.

3. A strictly limited number of fiscal measures

Sunak is keen not to announce many tax measures in Wednesday’s budget, although there are tidying up exercises.

It will reduce the tax surcharge on bank profits from 8 to 3 per cent, with the aim of keeping the City of London competitive on the world stage.

Self-employed people have reason to be a little nervous about this budget, as Sunak suggested last year that they should contribute more in taxes for the support they received during the pandemic.

Sunak seems to have decided to postpone a major reform of corporate rates: the Conservatives promised in their 2019 election manifesto to reduce the weight of the property tax.

4. Departments may be disappointed

Sunak is annoyed by critics who accuse him of presiding over spending austerity.

Whenever the Chancellor gets the chance, he points out that his daily spending plans already show the total growing by 3% each year between 2022-2023 and 2024-25. In this total, he will use the budget to allocate money to specific projects, amplifying the apparent generosity of his spending.

But it comes at a time when public services are under strain in the wake of the pandemic and Sunak is facing calls from MPs to increase spending on education, health and the courts. Higher inflation and the aging UK population will put additional pressure on Sunak to increase spending.

The other problem he faces is that health is now about 40 percent of daily spending.

Average annual real growth in resource budgets (%) bar chart showing the expected average annual growth in real terms of daily expenditure in each expenditure review

This leaves little money available for other departments in spending reviews and many may feel tight. Research and development, justice and local communities are areas that risk losing out.

Public sector workers will be prepared to be disappointed with the government’s proposed wage increases that do not match the likely rise in inflation to 5 percent in the coming months.

5. Help with the cost of living crisis and “leveling”

Sunak is expected to prioritize helping households and businesses amid rising food prices, higher energy bills and supply chain disruptions.

He has already announced some limited measures to offset the end of a temporary £ 20 per week increase in universal credit introduced during the pandemic and the Chancellor is expected to fund other small programs to support household fuel bills during the winter . There will likely not be an increase in fuel taxes for drivers.

Sunak is almost certain to allocate money in his budget to Johnson’s “leveling” program to reduce regional inequalities.

On Friday he allocated £ 7bn in capital spending on transport programs designed to cut travel times in cities outside of London.


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