A tactical Budget that spends today and taxes tomorrow

Rishi Sunak’s Budget did what it needed to for now. By extending relatively generous Covid-19 support measures until September — well after the economy is due to reopen — the chancellor avoided a nasty cliff edge. The Augustinian “make me chaste, but not yet” approach of spending now but taxing later starts to re-establish the Conservative party commitment to sound public finances. Signalling that much of the tax burden, when it comes, will fall on big business buries the vision of a low-tax, post-Brexit Britain. It also signals a shift in the Conservative orthodoxy that has reigned since the Thatcher era.

The chancellor was right to continue coronavirus support measures — including the furlough scheme that pays 80 per cent of workers’ wages and the £20-a-week uplift in universal credit — for six months. Increasing the headline rate of corporation tax from 19 to 25 per cent and freezing income tax thresholds will do most of the work in closing the current budget deficit — which includes day-to-day spending but not investment — by 2026. By postponing those tax moves, Sunak avoided the fears of many that he would embrace a premature fiscal retrenchment.

Beyond this support, however, the chancellor appears to believe that the UK’s rapid vaccination rollout is the only government stimulus Britain needs. True, this led the Office for Budget Responsibility to improve its near-term forecast for growth. But the fiscal watchdog estimates unemployment will peak at the end of 2021, after most support measures have ended and shortly before the “fiscal drag” of frozen tax thresholds come into effect.

While this Conservative government’s approach is the inverse of cuts in public spending and corporate tax pursued by its predecessor in 2010, moreover, this is still a chancellor who seems to look at the economy through the lens of the deficit rather than growth. There were few concrete measures to ensure that post-Brexit Britain will remain competitive, or that it will achieve its target of net zero carbon emissions. And there were only token efforts to “level up” growth outside London, beyond “free ports”, which are unlikely to achieve much.

The 6 percentage point increase in the corporation tax rate — bigger and faster than expected — risks making Britain a less attractive place to invest. True, the headline rate will remain below most G7 counterparts. But once deductions and allowances are included, corporate profits will be taxed more heavily than in other advanced economies. Britain will raise 3.2 per cent of national income through the tax, according to the OBR, by 2025-26 — the highest for more than three decades.

A review of the surcharge on banks — currently an additional 8 per cent — was promised to ensure corporation tax on the institutions does not “increase significantly”. But it will add to worries in the City after the loss of EU market access through a Brexit deal that prioritised goods.

The two-year “super deduction” of 130 per cent for corporate investment — subsidising capital spending — is bold and welcome. Yet it will only apply to “plant and machinery” and will do little for many services companies.

The chancellor’s budget was tactical. It fell short, however, on strategic vision and pushed some of the key questions facing Britain into the future. In the medium term the most important question is how to boost growth and prevent the OBR’s estimate of a permanent 3 per cent loss of national income due to the pandemic from becoming reality. In the longer term it is how to make Britain a better place to do business after Brexit.