Tax cuts will come before the next election, Rishi Sunak pledged on Wednesday as he laid out a Budget and spending review which promise a continued cost-of-living squeeze next year followed by a resurgence in earnings and public service standards.
The Chancellor insisted that he remains committed to Conservative orthodoxy despite being compared to Gordon Brown for his plans to hike state spending by more than 3 per cent every year, with the tax burden reaching its highest level since the 1950s when Britain was recovering from World War II.
He took advantage of an upgrade to the economic forecasts – and the new health and social care levy – to pump another £30bn into the public sector, at the same time as promising to balance the books on day-to-day spending by the time Britain next goes to the polls. But speaking to Tory MPs shortly afterwards, Mr Sunak said that in future he would use any further fiscal headroom to reduce taxes rather than increasing spending.
The second Budget of 2021 was accompanied by a spending review which sets the amount of cash available for every department over the next three years. Each one will see a real-terms increase in funding, the Chancellor said, with the Department of Health the biggest winner thanks to the ring-faced spending raised by the health levy.
The full impact of the 1.25 per cent tax – first announced last month – has been laid bare by the Office for Budget Responsibility (OBR), which estimated that as well as hitting taxpayers directly it would depress wages by 0.5 per cent a year as businesses reduce the amount they pay to make up for the increased cost of employing each worker.
Despite the Government’s promise to drive up living standards and create a “high-wage, high-skill economy”, pay increases are forecast to be slightly lower than 4 per cent inflation next year, before rising in real terms in the following years. Mr Sunak also stopped short of intervening directly to reduce soaring energy bills, with the exception of a freeze in fuel duty for the 12th year in a row.
The Chancellor focussed his cost-of-living efforts on the lowest-paid workers, announcing a rise in the minimum wage to £9.50 an hour and a change to the rules of universal credit which means benefits claimants will be allowed to keep 45p out of every extra pound they earn, up from the previous 37p. He said: “This is a £2bn tax cut for the lowest-paid workers in the country. It supports working families, it helps with the cost of living, and it rewards work.”
Mr Sunak concluded his speech to MPs with a promise to start reducing the size of the state after Government spending rose steeply in the wake of the Covid-19 crisis. He told the Commons: “As we look towards the future, I want to say this simple thing to the House and the British people – my goal is to reduce taxes. By the end of this Parliament, I want taxes to be going down not up.” The Treasury has refused to explain which taxes are going to be cut first but suggested that those levied on “working people” would be the most obvious contenders.
Paul Johnson of the Institute for Fiscal Studies said: “The Budget and spending review are much more similar to Gordon Brown’s than to George Osborne’s. To help fund the spending increases, the Chancellor confirmed big tax rises: this year has seen the biggest set of tax-raising measures
since 1993. It now looks like a large part of those tax rises is to be spent rather than being entirely used to reduce borrowing as originally announced.”
Critics accused Mr Sunak of failing to mitigate the impact of the £20-a-week cut to universal credit and ignoring the scale of the climate crisis with new policies including a halving of the tax paid on domestic flights.Internet Explorer Channel Network