Islington residents have only this week been notified of local tax rises, with a 5 per cent increase to council tax rubber stamped by council members. This equates to the average Islington family paying an extra £60 per year. These hikes have been justified to allow the council to increase spending on local initiatives. For example, £80 million has been earmarked to help propel local house building, and £17 million extra to help fund green initiatives, £6 million of which will go towards developing LTNs.
However, this week’s national budget will further help support Islington residents and businesses in the short-term but may hinder personal finances in the longer term. Changes to personal income will see some paying more than others to help cover the cost of the Treasuries monumental spending to protect jobs and livelihoods during the pandemic.
Since the onset of the Covid-19 pandemic, 700,000 Brits have lost their jobs and the country’s economy has shrunk by 10%, according to Chancellor Rishi Sunak, whose annual budget speech began with a stark reminder of the damage the nation’s economy has suffered.
Borrowing is at its highest levels in peacetime history. The UK has borrowed over £352 billion this financial year, though this figure is likely to rise to £407 billion when taking into account an additional £65 billion worth of extra measures to soothe the burn that is Covid-19.
While the figures seem bleak, the Office for Budget Responsibility (OBR) has assured the country that economic recovery will be “swifter and more sustained.” They estimate that a return to pre-Covid levels will be seen this time next year, with a growth rate of 4 per cent predicted in 2020 and 7.3 per cent in 2022.
“Our intervention has worked; unemployment is lower than predicted” Rishi Sunak
As Sunak laid out, it became clear that some difficult decisions lay ahead. The Chancellor spoke of his 3-point plan which included:
- Supporting Businesses
- Recovery and Fixing Public Finances
- Building for the Future Economy
Covid Support Continues
The government has decided to extend the furlough scheme until the end of Setember. This still means those on furlough will receive 80 per cent of their salary on hours not worked. However, from July, when the country begins to open back up, Sunak expects businesses to contribute 10 per cent to the scheme. This contribution will then increase by another 10 per cent to cover 20 per cent of the costs from August – September.
Those who are self-employed will see renewed support through the addition of more grants which can cover up to 80 per cent of a normal turnover. Those whose turnover sees a 30 per cent decrease will receive the full grant, and those seeing lower decreases in turnover will receive a 30 per cent grant. This scheme has now been opened up to an extra 600,000 self-employed individuals who filed their tax returns at the end of this financial year.
If you claim Universal Credit, the £20 per week boost will continue until September. Those claimants will also receive a one-off payment of £500.
However, a number of key new economic measures and incentives will be introduced to compliment the roadmap out of lockdown and the steady reopening from April onwards. Retail premises in Islington and across the country can claim up to £6,000 to help kickstart their recovery, while those in hospitality premises can claim up to £18,000.
To help incentivise consumption, increase spending and allow business to take home more money, Sunak has extended the 5 per cent reduced rate of VAT until September. After September, the rate of VAT will gradually increase to 12.5 per cent until next April when it will return to normal levels. Businesses will further benefit from the business rates holiday which will continue until the end of June.
Tough Decisions Ahead
However, with generous Covid-19 support comes substantial borrowing and Sunak acknowledged that some “decisions that no chancellor wants to make” have to be taken.
“Our approach to fixing the public finances will be fair too, asking more of those people and businesses who can afford to pay and protecting those who cannot” said Sunak.
The decision to freeze the thresholds of income tax, national insurance (NI) and VAT appear less sinister than increasing tax rates. However, this policy is used cleverly as a disguised tax rise for all. For an individual whose income increases with time this means they are more likely to pay more tax as the thresholds are no longer fixed to inflation.
Not only will individuals bear the brunt of the government’s historically significant levels of borrowing, but businesses too. While the government has deferred an increase in the rate of corporation tax until 2023, a new level set at 25 per cent will raise the Treasury considerably more money.
Although, Sunak reassured the House that only businesses that earn profits of £250,000 or more will be taxed at the full 25 per cent rate. Smaller businesses with profits of £50,000 or less will benefit from a lower rate of 19 per cent.
“This means 70% of companies – 1.4 million businesses – will be completely unaffected”
To help soothe any frustration from the proposed tax hikes however, Sunak has worked to incentivise business growth and reinvestment by introducing a ‘super deduction’. This policy will allow firms who invest in their growth to reduce their tax bill by 130 per cent of the cost.
Realist Approach
While the government has extended a range of Covid-19 economic support packages, the 2021 budget brings to light the challenges Britain’s economy faces as restrictions ease. Sunak labelled his policies for the year ahead as “fair and progressive” but spoke of the long recovery ahead.
Leaving the dispatch box to return to his seat, Sunak said: “It will be the work of many governments, over many decades, to pay back our borrowing.”
While underlying debt will peak at 97.1 per cent of GDP in 2023/24, Sunak reassured the public that the sooner we deal with the debt, the better we can be prepared for future crises.
