Firms benefit most from Chancellor’s £67bn short-term giveaway, but bear brunt of largest tax rises since the 90s

Chancellor gambles that stagnating household incomes won’t hold back the recovery, and cuts spending on public services

Businesses were at the centre of the Chancellor’s welcome £67bn extension of economic support over the next two years, but are also being asked to contribute most to bring the public finances into balance by the middle of this decade, with the largest rise in corporation tax for half a century, the Resolution Foundation said today (Wednesday) in the response to the Spring 2021 Budget.

The Chancellor has made the right call in extending emergency Covid support up to and beyond the planned end of public health restrictions. The Foundation notes that the extension of Job Retention Scheme (JRS) and Self-Employment Income Support Scheme (SEISS) takes their cumulative spend to £107bn, and overall crisis spending to over £340bn.

However, gaps remain in these plans including:

  • Despite the welcome extension of eligibility for SEISS grants to those filing a 2019/20 tax return, the Foundation estimates that over two-thirds of those workers who have taken an income hit, but been excluded from support, remain in that position.
  • The decision to end the £20 uplift to UC in October will see the UK’s poorest families seeing their income fall just as unemployment rises, and leave the basic level of benefits at its lowest level since the early 1990s.

Beyond the extension of emergency support, the Chancellor has announced a business-focused stimulus package – including the unprecedented £25bn super deduction tax incentive for investment.

The objective of unlocking the £118bn corporate cash pile built up during the pandemic to address the UK’s terrible recent investment record is very welcome. The sheer scale of the tax cut and the fact that it is taking place at a time of high uncertainty mean its impact is hard to estimate, but studies of a similar policy in the United States indicate it should increase overall investment levels significantly.

The Foundation adds that by focusing so much of his recovery support on businesses investment, the Chancellor is gambling that household consumption will recover strongly without further support.

While significant savings have been built up by higher income households during this crisis, the OBR’s forecasts show household income actually falling at the end of 2021, as support is withdrawn and unemployment rises.  The Foundation also notes that despite huge government support, one-in-three low-income families have seen their household balance sheets deteriorate during the crisis.

The tax rises set out by the Chancellor are sensible both in terms of the timing – with revenues raised once the recovery has been secured – and nature – with higher-income households paying most.

Freezing the Personal Tax Allowance (PTA) and Higher Rate Threshold from next year until 2025-26 will raise £8bn in that year alone, and still leave the PTA almost twice as high as its 2009-10 level.

The majority of the revenues will come from the richest households, with the richest fifth of households paying £720 per year more on average – twelve times that of the bottom 20 per cent of households (£60).

The scale of the £17bn rise in corporation tax, the largest since at least 1973, raises questions about whether it will actually be delivered.

The Chancellor may be hoping that some of these large tax rises can be watered down later on, but it is equally likely that more will be required, says the Foundation.

In part that reflects the fact that the Treasury has not only assumed that there is no permanent increase in public service spending as a result of this crisis, but has actually reduced such spending by £4bn a year.

Coming on top of an £12bn cut in the Autumn spending review, this would leave day to day public service spending outside of protected areas still almost one-quarter below its 2009-10 level in real terms by 2025-26.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The Chancellor has gone bigger than expected on both the giveaways and takeaways of this Budget – with firms in the front line in both respects.

“Welcome extensions of crisis support until the end of economic restrictions this summer are to be followed by a major new stimulus policy to drive business investment up in the coming years.

“The scale of that giveaway was only matched by the size of the Chancellor’s takeaway from firms by the middle of this decade, with the largest increase in corporation tax since the early 1970s being the centre piece of the largest tax raising Budget since 1993.

“With taxes rising to their highest share of GDP since the 1960s the Chancellor has chosen to prioritise the Conservative Party’s credibility for caring about the public finances over their attachment to low taxes. Whether that decision will stand the test of time remains to be seen.

“The Chancellor had far less to say about supporting households and their consumption in the recovery, gambling that higher savings built up during the crisis will outweigh the drag on consumption from rising unemployment and falling incomes this Autumn.

“This is a risk, as is the idea that public service spending can be cut by another £4bn in the years ahead compared to previous plans, when the pandemic has seen pressures build for more spending not less.”

Notes to Editors

  • The figures on the cash impact of the income tax thresholds freeze were corrected and updated on 9 March 2021.