Economic fundamentals
The OBR’s Economic and Fiscal Forecast set out the expected fundamentals of the economy and public finances over the forecast period. N.B. All of these forecasts are highly uncertain given pandemic and inflation risks:
GDP is forecast to return to pre-pandemic levels by mid-2022, six months earlier than predicted in November. Output is expected to be 3% smaller than if it had continued on its previous path.
Unemployment is expected to peak at 5.9% in 2022, lower than the 7.5% predicted in November, and fall down to 4.4% in 2025, still low by historical standards.
Underlying debt (excluding the Bank of England) peaks at 97.1% of GDP in 2023-24 before falling back to 96.8 per cent of GDP by the end of the forecast.
Borrowing is forecast to fall from a peacetime high of 16.9% of GDP to 10.3% next year and dropping considerably thereafter to 2.8% of GDP in 2025-26.
Debt interest is forecast to fall as a share of revenue from 3.5% in 2019-20 to ~2.3-2.5% across the remainder of the forecast period.
The tax burden will rise from 34% to 35% of GDP in 2025-26, its highest level since 1961. Over half of this increase is as a result of a 6 percentage point increase in Corporation Tax.
Key Budget policies
Super Deductions - 130% relief on capital investment in machinery for two years (Onward win)
£150m Community Ownership Fund to save pubs, post offices and football clubs (Onward win)
£22bn capitalisation for the National Infrastructure Bank (Onward win)
Corporation Tax for firms making over £50,000 profit to rise to 25% in 2023.
Freezing of the Income Tax Personal Allowance from 2023.
Towns: Treasury North to be in Darlington and 45 Towns Deals worth £1bn.
Furlough, business loans and self employment schemes extended for six months.
Today, the Chancellor set out a Budget that attempts three big things at once. First, it aims to safeguard the economy until everyone's had a jab. The extensions to furlough, self employed support and business loans to the Autumn amount to an additional £67 billion stimulus and will ensure the Government does not snatch defeat from the jaws of victory by turning off life support too early.
Second, Rishi Sunak set out big increases to tax for businesses and workers to fix the public balance sheet. Raising the headline rate of corporation tax to 25% freezing personal allowances from 2023 will generate £17 billion and £8 billion a year respectively by 2025-26. The OBR's forecasts are uncertain and these changes are undoubtedly painful but they will importantly pay for the pandemic in one fell swoop: the current budget deficit is scheduled to fall from 16.9% of GDP in 2021-2 to 0.1% in 2024-5.
Tax rises are also sweetened by wider changes, including the re-introduction of the small profits rate and the Super Deductions allowance - the only real rabbit in the Chancellor's hat - which temporarily allows businesses to offset 130% of the costs of machinery investment against future profits. As Onward has consistently argued, including last Friday, this policy is likely to boost investment in less productive regions, which are home to more capital intensive manufacturing firms.
These will be vital to the Budget's third strand: the economic recovery. Today's OBR forecasts show an economy whose fundamentals - despite the ravages of the last year - are strong. The OBR forecasts that unemployment will peak later on (in 2022) and at a lower level (5.9%) than previously projected (and below the rate (7.6) when Labour left office in 2009), and that the economic recovery will be sooner and more sustained than previously thought. GDP growth in 2022 is expected to be 7.3%, the highest annual growth since 1941, although the OBR expects the UK economy to be around 3% smaller as a result of the pandemic, permanently.
Two other things stand out from this Budget. The first is the relative lack of detail on net zero. This is expected, given the HM Treasury Net Zero Funding review is still underway. But aside from the National Infrastructure Bank's capitalisation, green gilts, and the announcement that the Bank of England's monetary policy remit will be changed to pursue environmental sustainability, there was not much about how the net zero transition will be funded. The Climate Change Committee expect the costs of decarbonisation to hit £50bn a year by 2030.
Secondly, it was a noticeably political budget. The Labour Party have wrapped themselves in knots with their aborted decision to oppose "immediate tax rises" that were never likely to materialise today. But they will be further hamstrung by the Chancellor's policy choices. Putting Treasury North in Darlington, unveiling freeports in Teesside, the Humber and Liverpool, and announcing 45 Town Deals to mix investment with devolution in left behind places all promise to solidify the Red Wall. More needs to be done, but this is a positive start.
It is foolish to pronounce a Budget a success immediately after the Chancellor has sat down and this Budget may yet unravel in places. But in acting big on both the pandemic and the economic recovery, the Chancellor has proven he has a long term plan for the economy.
Media
What we are saying
History lesson. Danny Finkelstein, Chairman of Onward’s Advisory Board, considers the thinking behind the Chancellor’s second Budget. Link.
Realignment. Onward’s director, Will Tanner, warns against oversimplifying the sentiments of Conservative voters’ towards tax rises. Link.
What others are saying
Budget politics. Tim Pitt praises the Chancellor for striking the right balance, but forewarns of the potential political fallout. Link.
Bounce back? Kate Andrews dissects the robustness of the Chancellor’s long-term plan for growth. Link.
Darlo dismissed. The director of the Institute for Fiscal Studies, Paul Johnson, questions the decision to move civil servants to Darlington. Link.