Rishi Sunak, chancellor of the Exchequer, has just announced the government’s fiscal plans for the coming year. Gifted with more optimistic economic forecasts compared to those produced by the IFS in March, Sunak was given more flexibility in his fiscal agenda with room for tax cuts or spending increases. The chancellor opted for a combination of the two, with more of an emphasis on the latter as a pose to tax reductions that the Tories have been traditionally associated with. As a result, Britain’s tax burden will rise to its highest level since the 1950s, with the tax burden reaching 36.2% of GDP. With this said, high inflation forecasts by economists are likely to hit the economy for years to come, resulting in predictions of real incomes stagnating. At the same time, Sunak has refused to reverse his stealth tax increases, resulting in falling disposable incomes that are set to leave the average family £3,000 worse off by 2026. It is therefore unsurprising that standards of living are set to fall, thereby rendering Sunak’s budget a complete failure, given his inability to address these fundamental issues.
Sunak announced a 50% business rate cut for restaurants, gyms, shops and the rest of the hospitality industry that will boost the economic recovery. These business rates are levied on brick and mortar stores, based on the value of the property. Given the struggles of the retail sector over the past decade, with the growing prominence of online shopping taking over from traditional brick and mortar stores, these tax reductions have been welcomed by many in the industry.
“We very much welcome the chancellor’s move today to extend the 50% business rates relief for the hospitality and leisure sector for the next financial year”Kate Nicholls – UK Hospitality Chief Executive
This tax cut will undoubtedly boost the post-pandemic recovery, as it will enable hospitality firms to offer low prices, thereby becoming more competitive with online retailers. Increased levels of retained profit will enable businesses to further invest and grow, increasing the productive potential of the economy in the long run, prompting economic prosperity and rising living standards.
In addition, the chancellor announced that he would be reforming alcohol duty, by unnecessarily reducing rates for most drinks. Alcohol will now be taxed on the strength of the drink, as a posed to the bureaucracy that was the previous taxation system; the number of duty rates will be more than halved from fifteen to six. All drinks that are above 8.5% ABV will be subject to the same higher rate of duty, with the cost of a ‘pint at the pub’ falling by 3p. Unsurprisingly, these changes have been welcomed by the alcohol industry, with the executive of the British Beer and Pub association claiming that these changes will ‘secure 9,000 jobs across the UK.’ With this said, this tax reduction is unnecessary, with a likely effect of marginally increasing alcohol consumption, given its inelastic demand. As alcohol produces negative consumption externalities, these adjustments will likely result in higher crime and growing NHS costs. These implications require higher public spending to deal with these social costs, making it less likely that Sunak will be able to reduce taxes in the near future without driving up the debt and deficit.
The announced reforms to air duty will see a reduction in passenger duty on domestic flights whilst higher rates on long-haul flights are also largely unnecessary. Flights between airports in England, Scotland, Wales and Northern Island will be subject to a 50% tax cut, at £6.50 for economy fliers. With this said, those flying over 5,500 miles will see their ticket prices rises, as a new £91 will be levied. As domestic flight prices are already at record lows, this reduction is unlikely to boost demand. Train ticket prices are currently far higher than plane flights domestically; a further reduction in flight tickets will do little to change this. An economy flight ticket to Glasgow from London Heathrow averages £25, whereas the same journey by train is upwards of £100. Provided that airlines adjust their fares accordingly, there will be a 26% reduction in domestic flights. As a result, these tax reforms are unnecessary and will do little to prompt an increased demand for domestic flights, given the lack of alternatives that consumers possess.
One of the more unexpected policy changes announced in the budget was the reform to Universal Credit, which will help people into work. Currently, all earnings above the work allowance for those on Universal Credit are reduced at a taper rate of 63%. The work allowance for Universal Credit claimants is £293 if including housing support, £515 if not. For every one pound earned above the work allowance, there is a reduction of 63 pence in Universal Credit payments. Sunak announced that this taper rate would be reduced to 55%. This policy encourages claimants to earn more money, with the previous rate resulting in a sharp reduction in benefit payments. This will greatly benefit those working. For example, a couple with two children, renting with one parent working full-time on the national living wage whilst their partner works 16 hours a week on the living wage, will be £1,800 a year better off as a result of these reforms. These changes will benefit working families, resulting in higher living standards and a system that rewards work not idleness.
With this said, Sunak announced that he would raise foreign spending to levels seen before the pandemic, representing a catastrophic waste of money. Amidst the pandemic, the chancellor cut foreign aid from 0.7% to 0.5% of GDP. This move was hugely popular with the electorate, with over 65% of the public supporting this move – a majority of all party supporters. The waste that excessive foreign aid spending represents for taxpayers is evident, who want to see their hard-earned money being spent domestically. However, Sunak will increase the percentage of GDP spent on foreign aid spending back to 0.7% by 2024. This is a terrible move that will prolong the tax cuts that Sunak has promised, with most of these funds going towards nations such as India and China that do not need foreign aid.
Ultimately, the budget represents a failure for working families across the UK. Whilst the reforms to Universal Credit are most certainly welcome, alongside the large reductions to business rates, the unnecessary tax reductions on domestic flights and most alcoholic beverages will only curb the government’s ability to reduce the deficit. Coupled with a terrible move to raise foreign aid spending, it is unlikely that the budget will go down well with the electorate, who want to see lower taxes and more efficiency within public services, as a pose to high taxes and excessive waste that Sunak’s budget puts us closer to.