Rishi Sunak today repudiated austerity as he used better than expected economic growth to boost spending on public services.
In the first budget that the chancellor has given without the spectre of Covid, he promised a real terms spending increase for “every single department” as he presented the Tories as “the real party of public services”.
In a series of announcements that undid much of the work of his Conservative predecessors over the past decade, Sunak promised the biggest increase in public spending this century alongside an “infrastructure revolution” largely funded by borrowing.
“As we come out of the worst economic shock we’ve ever seen, we’ve got a choice to retrench, or to invest,” he said. “This government chooses to invest.”
He said real term departmental spending would rise by 3.8 per cent by the end of the parliament — compared to previous plans for it to rise by 2.5 per cent which he said was the highest level in half a century, amounting to £150 billion by the end of the parliament.
The announcements unveiled by the chancellor include:
• The government is on track to restore cuts to international aid by 2024 due to better than expected public finances.
• £4.8 billion for local authorities over three years to help fix social care.
• A further £2 billion to schools, with a promise to restore per pupil funding to 2010 levels in real terms.
• An extra £2.2 billion for courts, prisons and probation services, including a £500 million fund to clear Covid-induced court backlogs.
• A 50 per cent discount on business rates for the retail, hospitality and leisure sectors for a year, worth £1.7 billion.
• Fuel duty will be frozen for another year.
Sunak also announced radical changes to alcohol taxes and reduce rates for English sparkling wine and low-strength ciders which he claimed was only possible because the UK was no longer in the European Union.
He said it was the biggest change to alcohol duties for 150 years with the principle that “the stronger the drink the higher the price.”
He said lower alcohol products would see a reduction in tax.
In a move to benefit pubs and bars, the chancellor also announced a new “draft relief” on the barrels of beer delivered to the hospitality industry.
This will cut duty by 5 per cent on beer and cider sold in a pub — the equivalent of 3p on a pint. The measures will come into effect in 2023.
The country’s sharp rebound from last winter’s lockdown means that the economy is predicted to grow by 6.5 per cent this year, the chancellor said. This is nearly twice as much as the 4 per cent predicted by the Office for Budget Responsibility (OBR) in its March forecast. It is due to grow by a further 6 per cent next year.
The OBR also reduced its estimate of long-term “scarring” by the pandemic from 3 per cent to 2 per cent of GDP, unlocking additional funds for the chancellor over the next three years. This gives the chancellor about £30 billion more a year to spend on public services and paying down the debt than he had at the last budget in March.
Sunak’s upbeat stance was tempered by the OBR, however, which warned it expected inflation to rise much faster than it previously estimated.
It said inflation this year would hit 4 per cent as a result of restricted supply chains and global energy prices. Sunak said these pressures would take “months” to ease.
Sunak acknowledged concerns about the “challenging backdrop of inflation” but attempted to allay them by revealing he had written to the Bank of England to “reaffirm their remit to achieve low and stable inflation” and stressing the government was “willing to act”.
There were suggestions last night that the chancellor was preparing to cut the universal credit rate from 63p to 60p in a pound.
The taper rate is the amount of universal credit payments people lose as they earn more above a certain amount, known as the work allowance. The plan, first reported by The Sun, would allow claimants to keep more of their earnings before their benefits are withdrawn.
Andy Burnham, the mayor of Greater Manchester, told Today on BBC Radio 4 that such a move would be “a credit for the Labour Party” which has been campaigning for change.
Ed Miliband, the shadow business secretary, stood in for Sir Keir Starmer at prime minister’s questions this morning as the Labour leader has tested positive for Covid-19.
Starmer, who had been expected to make a speech following the budget statement, will be replaced by Rachel Reeves, the shadow chancellor.
In an effort to burnish his Conservative credentials, Sunak set out fiscal rules to keep the government “on the path of discipline and responsibility”. These committed him to balancing the books for day-to-day spending in “normal times”, allowing borrowing only for capital investment, and to ensure that net debt is falling as a proportion of GDP.
He said these rules would be met by the end of the parliament, with debt peaking at 85.7 per cent of GDP in 2023-24 and falling after that.
“We will meet our fiscal rules with a margin to protect ourselves against economic risks,” he said. “Just a one percentage point in inflation and interest rate would cost us around 23 billion pounds.”
Sunak announced an extra £2 billion for schools on top of £3.1 billion already pledged to help students catch up after the disruption from the pandemic.
He pledged to restore school funding per pupil to 2010 levels after it fell to its lowest level in a decade last year. Adjusted for inflation, spending per pupil was £6,900 in 2019-20 compared with £8,000 in 2010-11.
He announced an increase in the skills budget of £3.8 billion over the duration of the parliament, an increase of 42 per cent.
The Treasury downplayed suggestions yesterday that Sunak would use his budget to directly address the cost-of-living crisis.
However, Paul Johnson, director of the Institute for Fiscal Studies, said that one option would be to announce an eye-catching rise to the personal income tax threshold that he froze until 2026 in last March’s budget. “The pressure from No 10 will be for the chancellor to use the proceeds of better-than-expected growth on spending,” he said. “This might take the form of increased public sector spending or reversing some of the effective tax rises he imposed back in March. One obvious ‘rabbit’ would be to increase the personal income tax threshold in line with inflation.”
Addressing MPs today Sunak is expected to say that the budget will begin the work of “preparing for a new economy post Covid. An economy of higher wages, higher skills, and rising productivity. Of strong public services, vibrant communities and safer streets. An economy fit for a new age of optimism.”
A government source added: “At the time of the last budget all the economic forecasters were predicting that Covid would result in a massive hit. What we will see today is that those forecasts were pessimistic. We are going to be moving on with our recovery with the economy showing resilience and growing much more strongly than was predicted.”
The former Treasury minister David Gauke told the BBC: “There are still some real challenges for the economy: we may well be seeing a slowdown, there are risks with inflation [and] potentially a trade war with the EU. I suspect the chancellor will have good news in the short term but be fairly cautious with it.”