British households and businesses will bear the biggest tax burden since the 1960s after Rishi Sunak laid out plans to start fixing the country’s finances after the coronavirus crisis.
The Chancellor used his budget to extend the leave scheme and increase universal credit as part of a £ 65bn lifeline for an economy still affected by the pandemic.
But taxes on corporate profits are expected to be increased starting in 2023, while income tax thresholds will be frozen, meaning more than a million more people will be forced to pay them as tax increases. wages increase.
The Office for Budget Responsibility (OBR) said increasing the overall corporate tax rate, freezing personal tax allowances and thresholds and cuts of around £ 4 billion in plans of departmental spending would increase a total of £ 31.8 billion in 2025-2026.
The measures increase the tax burden from 34% to 35% of gross domestic product (GDP) – a measure of the size of the economy – in 2025-2026, “its highest level since Roy Jenkins was Chancellor at the end of the 1960s ”.
Analysts expect the tax hikes to help eliminate the current budget deficit in 2025-2026, which means the government is not borrowing to finance current spending.
Mr. Sunak told MPs: “These are important decisions to be made. Decisions that no chancellor wants to make.
“I recognize that they might not be popular. But they are honest.
He said the total package of measures to support the economy – including those already announced – stood at £ 407 billion, but warned the unprecedented spending could not continue.
The point at which people start paying income tax will increase from £ 70 to £ 12,570 in April, but will be maintained at that level until April 2026, meaning more people will be forced to pay taxes as wages increase.
The 40 pence rate threshold will rise from £ 270 to £ 50,270 and then freeze, with measures bringing in nearly £ 8.2bn in 2025-2026.
The Institute for Fiscal Studies (IFS) said around 1.3 million people would be subject to the income tax system, with around 10% of adults subject to the higher rate of 40 pence.
Corporate tax will rise from 19% to 25% in 2023, amounting to £ 17.2 billion in 2025-2026, although only companies with profits of £ 250,000 or more will pay the full rate .
There will be a “super deduction” for businesses when they invest, reducing their tax bill by 130% of the cost.
Mr Sunak insisted that the UK would still have the lowest effective corporate tax rate in the group of industrialized G7 economies.
At a press conference in Downing Street, he defended the increased tax burden, saying: “I don’t think any other chancellor has had to give the country as much tax support as I have.
Confederation of British Industry chief executive Tony Danker said the move “would inspire great inspiration for many companies and send a worrying signal to those considering investing in the UK”, although he welcomed the measures to protect the economy now and to revive the recovery.
While economists have broadly agreed that immediate steps to fix the country’s finances are not needed as long as the impact of the coronavirus crisis is still being felt, the need for medium-term action has been underscored by politicians. OBR forecasts.
Mr Sunak said borrowing this year was £ 355 billion, 17% of national income – the highest level since World War II – while next year it is expected to be £ 234 billion pounds sterling, 10.3% of GDP.
He added: “Without corrective action, borrowing would continue at very high levels, leaving the underlying debt to rise indefinitely. “
The fiscal measures will see borrowing fall to 4.5% of GDP in 2022-2023, 3.5% in 2023-24, then 2.9% and 2.8% the following two years.
The underlying national debt, excluding the Bank of England, will peak at 97.1% of GDP in 2023-24, the OBR said.
The OBR expects the economy to return to its pre-Covid level by the middle of next year, six months ahead of schedule as part of a “faster and more sustained recovery ”, Largely thanks to the deployment of the vaccine.
But five years from now, the economy will still be 3% smaller than it would have been had the pandemic not struck.
Growth next year is expected to be 7.3%, down from 6.6%, but the OBR has cut its GDP forecast every two years until 2025, including a reduction for that year to 4% from compared to the 5.5% growth previously expected.
Unemployment caused by the pandemic is expected to be lower than expected, peaking at 6.5%, against 11.9% expected last July.
The chancellor also:
– Extended the stamp duty holiday for properties under £ 500,000 until the end of June, then a new threshold of £ 250,000 will apply until the end of September before dropping back to £ 125,000.
– Confirmed that the leave scheme will last until the end of September, although employers will have to make a contribution from July.
– Extension of the reduced VAT rate of 5% for the tourism and hospitality sector until the end of September, with a provisional rate of 12.5% for another six months after that.
– Continuation of business tariff vacations for the distribution, hotel and leisure sectors until the end of June, with a discount applicable for the rest of the year.
– Announces the temporary £ 20 per week increase in universal credit payments will continue for another six months.
– Set up a new payback loan program to replace previous coronavirus loan packages, allowing businesses of any size to apply for loans ranging from £ 25,000 to £ 10million through the end of the year year, the government providing lenders with an 80% guarantee.
– Freezing of duties on alcohol and removal of a planned increase in duties on fuel.
– Announcement of eight new free ports in England and a new “economic campus” for the Treasury and other departments from Whitehall to Darlington.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said “we are in a new phase in UK economic history” and “taxes (are) likely to be theirs. highest level supported “.
Labor leader Sir Keir Starmer said the budget was a “quick fix, covering the cracks” which “did not even try to rebuild the foundations of our economy or ensure the long term prosperity of the country”.