UK Budget 2021: The Rishi Rebound

The UK Chancellor, Rishi Sunak, recently announced his 2021 UK budget, with two significant goals in particular:

1. Provide support for households and businesses through the final stage of the coronavirus pandemic.
2. Provide a roadmap for how the government plans to reduce the fiscal deficit over time and pay for pandemic support measures. 

The first goal was achieved through an extension of the various support schemes (i.e., furlough payments, universal credit top-up, hospitality VAT reduction, and mortgage stamp duty holiday) to September 2021, in the majority of cases. 

The chancellor has implemented plans for his second goal, with the announcement of two tax measures. The first is the freezing of income tax bands until 2026. This has the advantage of being a stealth tax increase, as rising wages and inflation do the work, avoiding a politically unpopular announcement of higher tax rates. This will raise an impressive £8 billion per year by 2025-26. The second is an increase in the corporate tax rate from 19% to 25%, which will take effect in 2023. 

It is this second goal, however, that is likely to dominate the fiscal debate over the next few years. 

Repaying the COVID-19 support debt

The level of support for businesses and individuals during COVID-19 has been unprecedented. The country now faces the challenge of repaying the vast amount of debt. There are four ways to reduce the ratio of government debt-to-GDP (gross domestic product): first, outgrow the debt burden; second, tighten fiscal policy; third, default; and fourth, inflate away the debt.

We can rule out default as a realistic option for the UK. This budget has attempted to achieve a balance between stimulating growth in the near-term and tightening fiscal policy over the medium-term to control the debt and deficit. The projections from the Office for Budget Responsibility (OBR) have public sector net-debt peaking at 109.7% of GDP in 2023-24 (a post-World War II record) and the budget deficit declining from 13.3% of GDP to be in balance by 2025-26. Tax as a share of GDP is projected to reach 35% by 2025-26, which will be the highest level since the late 1960s. 

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