Budgets & fiscal events

Economy and public finances

Spending fast, taxing slow

Resolution Foundation analysis of Budget 2021

4 March 2021

Torsten Bell

Mike Brewer

Nye Cominetti

Karl Handscomb

Kathleen Henehan

Lindsay Judge

Jack Leslie

Charlie McCurdy

Cara Pacitti

Hannah Slaughter

James Smith

Greg Thwaites

Daniel Tomlinson

This briefing note provides an assessment of the measures announced in the March 2021 Budget. The context for this Budget was an intensification of the Covid-19 pandemic, creating a need for further policy measures to support families and firms in the months before the completion of the vaccine rollout. In response, the Chancellor announced significant additional policy support for the economy in the first two years of the forecast. He also outlined plans to repair the damage to the public finances by raising taxes in the middle of the decade.

Key findings

This was a much bigger Budget than expected both on spending and on taxation. Around £70 billion in additional fiscal support for the economy over the next two years was announced. This was combined with plans for the largest tax increases since 1993. In both cases, firms were at the forefront of the impact.
An extension of the short-term crisis support measures was announced lasting beyond the planned end of public health restrictions this summer. The Coronavirus Job Retention Scheme was extended to September contributing to a lower peak for unemployment in the Office for Budget Responsibility’s forecast of just 6.5 per cent (down from 7.5 per cent). This would be by far the lowest unemployment peak in any recent recession, despite this being the deepest downturn for 300 years. Overall crisis spending will now total over £340 billion, or £12,400 per household.
The Chancellor sought to boost the recovery from the pandemic by giving firms a large incentive to invest with an unprecedented £24 billion ‘super deduction’ tax incentive. But firms were also subject increases in Corporate Tax worth £17 billion – as part of a £29 billion increase in taxes by the middle of this decade – by far the largest change to Corporation Tax revenues since the 1970s.
For other tax rises, the Chancellor turned to the least-visible options, freezing thresholds for a whole swathe of taxes from inheritance tax to VAT. The majority of the revenues will come from the richest households, with richest fifth of households paying £720 per year more on average – twelve times that of the bottom 20 per cent of households (£60).
There was much less by way of lasting support for households in the recovery reflecting a judgement that – particularly with many (higher-income) families having built up savings during this crisis – consumption will bounce back swiftly. But with unemployment set to rise later this year and the Chancellor deciding to end the £20 uplift to UC at exactly that point leaving the poorest households facing a 7 per cent fall in income in the second half of 2021-22.
Further big questions await the Chancellor on protecting household incomes and managing the squeeze on some public services. More policy measures may well be needed, particularly if the economy turns out weaker than hoped.

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