The Chancellor Rishi Sunak has delivered the 2021 Spring Budget focussing on the next stage of the response to the COVID-19 pandemic.
Emily Hall, Senior Economic Analyst at Pegasus Group, summarises the main points from his 51-minute speech, looking closely at what he had to say about the housing market, supporting businesses, skills and infrastructure.
The Chancellor began by saying that coronavirus has fundamentally altered the lives of everyone across the Country with 700,000 jobs lost since March. The economy has shrunk by 10% – the largest fall in over 300 years and the Government has, so far, provided over £280billion of support, protecting jobs, keeping businesses afloat and helping families. In response to the impact of the pandemic, the Chancellor set out a three-part plan to protect the jobs and livelihoods of British people:
- To continue to do whatever it takes to support the British people and businesses through the crisis.
- Fixing public finances.
- Building the future economy.
OBR Forecasts (March 2021)
Alongside the Budget announcements, the Office for Budget Responsibility published its March 2021 ‘economic and fiscal outlook’ report. The Report sets out forecasts up to 2025-26 taking into account latest data and the Government policies announced in the Budget. The OBR state that the rapid rollout of effective vaccines offers hope of a swifter and more sustained economic recovery, albeit from a more challenging point than was forecast in November. Key statistics from the OBR include:
- The latest forecasts from the OBR estimate that in 5 years’ time, the economy will be 3% smaller than it would have been in the absence of the pandemic.
- In repairing the long-term damage of coronavirus, the OBR forecasts that the economy (GDP) will grow by 4% this year, 7.3% in 2022 and 1.7%, 1.6% and 1.7% respectively in the three years following.
- The OBR have indicated that the Government’s interventions to support jobs have worked. For example, in July 2020, the unemployment peak was forecast to be 11.9% whereas now it is forecast at 6.5%, meaning 1.8 million fewer people are expected to be out of work than previously thought.
- Fiscal forecasts show that this year the Government has borrowed a record amount at £355billion (17% of national income) – the highest level of borrowing since WW2. Next year borrowing is forecast to be £234billion (10.3% of GDP). With the interventions highlighted in the Budget, borrowing is forecast to fall to 4.5% of GDP in 2022/23; 3.5% in 2023/24; 2.9% in 2024/25; and 2.8% in 2025/26.
- Underlying debt is forecast to rise from 88.8% of GDP this year to 93.8% in 2022/23. It is then forecast to peak at 97.1% in 2023/24 before falling slightly to 97% in 2024/25 and 96.8% in 2025/26.
Supporting People & Businesses
The Chancellor announced in the Budget:
- The Furlough scheme will be extended until the end of September with no change to the terms for employees who will continue to receive 80% of their salaries for hours not worked until the scheme ends. For businesses, they will have to contribute to the cost of paying their employees – 10% in July and 20% in August and September.
- Support for the self-employed will continue until September with a fourth grant from Feb-April and a fifth and final grant from May onwards which will provide three months of support at 80% of average trading profits. As the economy reopens over the summer, full support will be targeted to people whose turnover has fallen by 30% or more and people with a turnover that has fallen by less than 30% will receive a 30% grant. Provided self-employed people have filed a tax return, they will have access to the grants.
- To support low income households the Universal Credit uplift of £20 a week will continue for the next six months. Working tax credit claimants will be provided with equivalent support with a one-off payment of £500.
- The national living wage will be increased to £8.91 from April, an annual increase of almost £350 for people working full-time on the national living wage.
- The Government is focussing on programmes to get people into work and increase skill levels. This includes paying businesses more to hire apprentices, with the incentive payment doubling to £3,000.
- Businesses will be provided with a new Restart Grant in April. Non-essential retail businesses will open first and will receive grants of up to £6,000 per premises. Hospitality and Leisure businesses (including personal care and gyms) will open later and receive up to £18,000.
- £700million will be made available to support arts, culture and sporting institutions as they re-open.
- A new Recovery Loan scheme. Businesses of any size can apply for loans from £25,000 up to £10million until the end of 2021. The Government will provide a guarantee to lenders of 80%.
- The 100% business rates holiday to all eligible businesses in the retail, hospitality and leisure sectors will continue until the end of June. For the rest of the year, rates will be discounted by two thirds (an overall £6billion tax cut).
- The hospitality and tourism sector has been hit particularly hard by the pandemic. To protect jobs in this sector, the reduced rate of 5% VAT will be extended by six months to 30 September. An interim rate of 12.5% will then be in place until April 2022.
- The Stamp Duty nil rate band of £500,000 will continue until 30 June this year. The band will then be reduced to £250,000, double the usual level, until the end of September 2021 when it will return to £125,000 from 1 October.
- Lenders who offer mortgages on a 5% deposit will benefit from a Government guarantee. Many big lenders will be offering 95% mortgages from next month, including: Lloyds, NatWest, Santander, Barclays and HSBC. More lenders (including Virgin Money) will follow shortly after. The Government wants to turn ‘Generation Rent’ into ‘Generation Buy’.
Fixing Public Finances
In order to reduce borrowing and stop underlying debt from rising, the Chancellor stated that:
- Rates of income tax, national insurance and VAT will not be increased.
- Next year, the basic personal tax allowance will go up to £12,570, but will then be frozen until April 2026. The higher rate threshold will also go up to £50,270 and then will be frozen for the same period.
- Inheritance tax, the pensions lifetime allowance, the annual exempt amount of capital gains tax will be maintained at current levels until April 2026 and for two years from April 2022, the VAT registration threshold will be frozen at £85,000.
After April 2023, the rate of Corporation Tax paid on company profits will increase from 19% to 25%, but companies with profits of £50,000 or less will still pay 19% (meaning around 70% of companies will be unaffected). Only businesses with a profit of £250,000 or higher will pay the highest rate (around 10% of firms).
Building the Future Economy
In order to build the Country’s economy in the future, the Chancellor announced that:
- The future economy needs investment in green infrastructure. The Chancellor announced the UK’s first ever infrastructure bank (located in Leeds) which will have an initial £12billion to invest in public and private projects to finance the green industrial revolution. Rishi Sunak highlighted offshore wind in particular as an innovative industry in which the UK has a global competitive advantage.
- The Government wants to support digital, with many businesses moving online during the pandemic. It will help small businesses to develop digital skills by giving them free, expert training and a 50% discount on new productivity enhancing software.
- A £150million fund to help communities across the UK to help people take ownership of pubs, theatres etc. will be created.
- There will be eight locations for Freeports – special economic zones (usually around a maritime port or airport) with different rules to make it easier and cheaper to do business. They will have planning to allow businesses to build; infrastructure funding to improve transport links; and goods can be imported without having to pay tariffs. The locations are:
- East Midlands Airport
- Felixstowe and Harwich
- Liverpool City Region
Overall, the Chancellor announced an additional £65billion of measures over this year and into 2022 to support the economy in response to coronavirus. The OBR state that uncertainty around the economic outlook remains considerable, with the course of the pandemic still the greatest single risk.
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