Budget 2021: Not quite austerity, definitely not prosperity – Liberal Article
So, the 2021 budget has been released. Taxpayers’ relief that income tax rates were not rising was short-lived. It was dampened by the realisation that, with the various freezes to income brackets and personal tax allowance, taxpayers will eventually be paying more tax as a result of Rishi Sunak’s plan. As wages rise, millions of Brits will move into a new tax bracket. An estimated 1.7 million will begin to pay tax on their earnings for the first time.
We should be thankful that Sunak held firm against the calls from his backbenches to rein in spending. Extending the Universal Credit uplift and the Furlough scheme will help protect those whose industries have not fully recovered. There had been calls to link the economic unwinding to Boris Johnson’s ‘roadmap’. However, this naively assumed that everything will leap back to normal on June 21st… which it won’t.
It was rare to see a politician so upfront as Sunak was, acknowledging that there will be a squeeze coming. That it would be irresponsible to part with the kitchen sink if it wasn’t necessary. But the veiled truth is that Britain’s taxpayers will be paying more tax in the future. This is an evident departure from Johnson’s pledge to give tax breaks to the higher rate tax bracket. It signals that he is trying to craft a fiscal package that is as agreeable as possible. However, low-income households and those already struggling are likely to fall through some pretty significant cracks.
Firstly, the freezing of the Personal Tax Allowance means that as the national living wage rises, households who were previously exempt will now begin paying tax. While their tax bills will be marginal, it is an added expense on top of the growing crisis of rent and utility bills.
While the extension of Furlough is welcome, it seems illogical to tie its ending to the reduction in Universal Credit and the Working Tax Allowance. Both have been instrumental in helping families stave off poverty, although neither have fully succeeded. The UK already has one of the lowest out-of-work support schemes in the OECD. Reducing it right before unemployment is expected to jump will be a real kick in the teeth to those who find themselves without a job as the summer season winds down.
Most infuriating, though, is that working households – mostly the middle class – will be bearing the brunt of the tax burden going forward. Whilst it may be a controversial move in Conservative circles, Sunak’s choice to raise the Corporation Tax is a step in the right direction. However, it will not be enough to capture the lost tax that large multinational tech firms avoid paying using their elaborate corporate structures.
A growing source of income for the rich was untouched by Sunak’s plan. The capital gains and other alternative income taxes have not risen or been frozen; whereas the income of those who have been fortunate to keep jobs over the pandemic will see their disposable incomes fall over time as the frozen brackets begin to bite.
Whilst leaving this source untapped, the Tories also handed a giveaway to the wealthy by extending the stamp-duty holiday. This will allow the overheated housing market to run further out of the hands of regular people. The fallacy of high house prices spurring supply is evident by the record increases in prices with relatively little increases in house building. Instead, the market is being dominated by those who can easily obtain credit, buying second homes, or buying properties to let for additional income. All of this means pushing up prices and people onto the streets.
Also missing from this budget was any new spending on green initiatives. ‘Building back better’ should be about building back greener. This is probably too much to ask from a government that gave the green light to a new coal mine about 100 miles from the site of the Glasgow UN Climate Conference. Cynically though, this could have been a real opportunity to earn at least some respect from environmentally conscious voters and those who have found themselves unemployed. Solar panels and wind turbines aren’t going to install themselves after all.
The budget is always met with mixed emotions; it could always be worse, usually does some good, but leaves a lot to be desired. This one is no different. While the continuation of COVID-19 emergency spending is welcome, it will exacerbate inequalities down the line due to the lack of attention to the needs of low-income households; the tapping of working and middle-class wages; failure to include alternative incomes of high earners, and more. Not great when COVID-19 has been doing that already.
Written by Junior Liberal Writer, Daniel Jones
Point of Information
Taxes Will Come Eventually – A Conservative Response
Firstly, a bit about Johnson’s ‘departure’ from his pledge to reduce those in a higher tax bracket. These statements were made in September 2019. I think we can all agree that this was a very different economic climate than the one we are in currently. I think that offers some leeway on changing this. The situation has obviously changed, and action has to change with it. Context is being left out. I wonder how different the Conservative manifesto would be if they were allowed to rewrite it for COVID times.
Secondly, I too am surprised that there was no mention of any green initiatives – though, as Daniel himself hints at, the crisis won’t be over by June 21st. This means that the government must still be on a crisis footing, whilst focusing on building back greener. This is only the beginning of the recovery, which can only begin in earnest when all parts of society are open again. Hopefully, after this, the government can take meaningful steps towards its climate commitments and ideas.
To quickly address the swipe at the mine, the government has not backed it at all. They let the local council make the decision, and writers at POI often stress the need for decentralisation. The council has also decided to review the decision, which means the mine might not go ahead anyway. Daniel jokes that solar panels and wind turbines won’t build themselves but ignores that coal doesn’t mine itself and will provide hundreds of jobs for the area, secondly this coal isn’t being used to make electricity. It will be used in the steel industry.
Daniel says that the Furlough scheme ending after summer will be a ‘kick in the teeth to workers’ but we cannot keep it running forever, that would be too costly. It has to end at some point, business must return to paying their employees, not the central government. Given that it will wind down over the summer and not just abruptly end, it will give businesses time to prepare for that. No doubt there will be unemployment, but the Sunak himself has stated that he can’t save every job. Trying to do that is an unrealistic goal. I will concede that the extra £20 Universal Credit should have a similar wind down in order to similarly avoid an abrupt end.
The Office of Budget Responsibility moved forward its forecast of GDP to return to pre-pandemic levels to the middle of next year. Growth is expected to be 4% this year, and 7.3% in 2022. These rates will mean more jobs, and thus more money in the pockets of people. A major rise in tax would stifle this recovery, but I’m sure they will come at a later time.
Written by Senior Conservative Writer, Kieran Burt
A Shift in the Overton Window? – A Labour Response
Daniel makes some excellent points here. What strikes me about this budget is how far left the political consensus has shifted in the past year. Rishi Sunak’s budget is similar to what was proposed in the Labour manifestos of 2017 and 2019: higher corporation taxes; increased fiscal spending; VAT and national insurance frozen. However, this is still firmly a Tory budget. I have no doubt that there will be significant spending cuts later down the line in the economic recovery.
Daniel talks of the lost revenue from capital gains ‘or other income taxes’ have been left untouched. I agree that perhaps there is a missed opportunity here. However, I think the lack of a wealth tax is the most significant lost source of revenue. Back in December, a group of professional economists recommended the use of a one-off wealth tax as a fair, non-distortionary way to raise revenue. In this report, they estimate that a 1% tax on all wealth above a threshold of £1 million per household would raise a staggering £260 billion alone.
This is with a minimal distortionary effect, especially compared to Sunak’s effective tax rise for millions of Britons. The one-off nature of the tax means that the behavioural response should be limited. Furthermore, given that since the pandemic began, the wealthy have gotten even wealthier, a wealth tax can also serve to reduce the UK’s grotesque levels of inequality.
Daniel’s claim that there is no new spending on green initiatives is valid. It reflects the stubborn refusal of most politicians to tackle what will become the defining issue of the next two decades. Nevertheless, I must mention that the budget included the creation of a new UK infrastructure bank; its raison d’etre is to finance schemes that help achieve net-zero carbon targets. This is largely intended to replace the European Investment Bank post-Brexit. Yet, it will only provide half the funding. So I join Daniel in his disappointment at the lack of green initiatives in this budget.
Written by Deputy Chief Labour Writer, Brian Byrne