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This Budget was the first delivered by Rishi Sunak, the Chancellor, that wasn’t dominated by managing the pandemic, although the impact of the coronavirus was still front and centre in the policy decisions taken.

Along with the Budget, the Chancellor announced the results of the Spending Review. This sets departmental budgets for the following three years, up to 2024/25. It was the first multi-year spending review since 2015.

The Budget and Spending Review were accompanied by the OBR’s latest set of official forecasts for the economy and public finances.

Policy announcements

Taxes

The Chancellor announced various changes to taxes, including:

  • A freeze on fuel duty in 2022/23, for the twelfth consecutive year.
  • A one-year freeze on alcohol duty from February 2022, followed by a reform to alcohol duties.
  • Various changes to business rates, including a new, temporary 50% relief for retail, hospitality, and leisure businesses in 2022/23, up to a cap, and a freeze to the business rates multiplier in 2022/23.
  • An extension of the temporary higher £1 million level of the annual investment allowance until 31 March 2023. This is a capital tax allowance for certain investments in plant and machinery.
  • Changes to air passenger duty, with a new band and lower rates for domestic flights, and a new band and higher rate for travel over 5,500 miles. 
  • A reduction of the bank surcharge on top of corporation tax from 8% to 3%, from April 2023. The annual allowance on the surcharge will rise to £100m. This follows planned increases in the standard rate of corporation tax, which is rising from 19% to 25% in from 2023/24.  

Benefits and wages

Changes to benefits and wages include:

  • Changes to Universal Credit (UC) to reduce the amount that is taken away as earnings rise, including a fall in the taper rate for UCfrom 1 December. This means a person’s UC award will be reduced by 55p, rather than 63p, for every £1 of net earnings above any work allowance.
  • The National Living Wage for people aged 23 or over will increase from £8.91 to £9.50 an hour from April 2022. There will also be increases to the National Minimum Wage rates for younger people and apprentices.
  • An end to the one-year public sector pay freeze.

Spending Review

At the Spending Review, the Chancellor set out his plans for the Government to spend a total of £3,234 billion across the years from 2022/23 to 2024/25, the equivalent of about £48,200 for every person in the UK. This total is substantially higher than expected, with the spending ‘envelope’ for 2022/23 nearly £27 billion higher than had previously been announced.

The Department for Health and Social Care and the Department for Education between them account for over half of all the extra funding allocated for day-to-day spending at the Spending Review (compared to 2021/22 spending levels). Other major areas of spending increases include the Foreign, Commonwealth and Development Office (including a return to spending 0.7% of gross national income on overseas aid in 2024/25) and local government.

Extra funding by department in 2024/25 announced in spending review

Although the Chancellor said that no department’s spending would be cut in real terms between 2019/20 and 2024/25, some departments’ budgets will remain essentially flat, and increasing spending pressures may continue to cause problems.

The Ministry of Defence’s day-to-day budget will decline in real terms between 2021/22 and 2024/25. Other departments’ budgets will increase sharply next year but then fall back somewhat in 2023/24 and 2024/25.

Capital (investment) budgets were set for each department as well – the largest increase was for the Department for Business, Energy and Industrial Strategy (around £4 billion higher in 2024/25 in real terms than in 2021/22). Several departments’ capital budgets are decreasing.

Spending profiles for two new funds were also allocated as part of the Spending Review – the Levelling Up Fund and the UK Shared Prosperity Fund, each of which will be spending close to £1.5 billion in 2024/25.

OBR forecasts: The economy

The OBR revised higher its forecasts for economic growth. GDP growth is now forecast to be 6.5% in 2021, compared with 4.0% forecast previously.

The OBR’s forecasts for inflation reflects the recent rise in prices. The OBR forecasts a peak of 4.4% in the annual inflation rate of CPI during the second quarter of 2022. That compares with 3.1% in September 2021 (the most recent outturn figure). The OBR said that additional developments since it closed its forecasts (on 24 September) would be in line with inflation peaking at close to 5% next year.

OBR forecasts for GDP and inflation

The OBR said that the labour market has “proved more resilient” than it had expected in March. It now expects unemployment rate to peak at a lower level of 5.2% in the fourth quarter of 2021. In March it had forecast a peak of 6.5%.

The OBR raised its forecasts for average wage growth in 2021-2023. However, due to rising inflation the OBR said that real (inflation-adjusted) wage growth over the next three years would be “subdued”.

Estimates of the sustained economic damage caused by the pandemic have been lowered. Previously, the OBR forecast GDP to be 3% lower in the “medium term” compared with its pre-pandemic trajectory. It now thinks it will be 2% lower. The OBR stressed the large degree of uncertainty associated with this forecast.

OBR forecasts: The public finances

OBR forecasts for government borrowing – the budget deficit – have been lowered, against the background of improving economic forecasts. Compared with the OBR’s March 2021 forecasts, borrowing is now expected to be lower in every year.

The OBR forecast the budget deficit to be £183 billion (7.9% of GDP) in 2021/22, compared to its March 2021 forecast of £234 billion (10.3% of GDP). This then falls to £83 billion (3.3% of GDP) in 2022/23. While lower than previously expected, the budget deficits in 2020/21 and 2021/22 are very large by historical standards.

Largely due to the large budget deficits, public sector net debt has increased since the start of the pandemic. As a proportion of the value of annual economic output (GDP), net debt has risen from 83% of GDP in 2019/20 to a forecast 98% of GDP in 2021/22. It is then expected to gradually decline, as economic growth outpaces increases in debt. By 2026/27 (the last year for which the OBR provides forecasts), debt is anticipated to fall to 88% of GDP.

A measure of net debt that excludes the Bank of England is proposed by the Chancellor to be the measure used in a new fiscal target. This underlying measure shows net debt as a proportion of GDP remaining fairly steady in forthcoming years, before falling in 2025/26 and 2026/27. Excluding the Bank of England means that this measure of underlying debt isn’t affected by some temporary policy measures that the Bank has taken following the EU referendum and pandemic.

OBR forecasts for the budget deficit and net debt

Further information

The Library briefing The Budget and the annual Finance Bill discusses the way that Parliament debates the Budget and scrutinises the Finance Bill.


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