Budget day is one of the two most important Parliamentary events of the year – the State Opening being the other. Last week’s, however, was even more important than usual.
Chancellor Rishi Sunak came to the Commons facing two great challenges. First, he had to continue to protect people’s livelihoods, to ensure that when lockdown ends, the economy returns to something approaching full operation as quickly as possible.
Secondly, he had to prepare the country for the inevitable day when repairing the public finances must begin. So far this financial year, the pandemic has cost £280 billion in borrowing, which has to be paid back.
The Chancellor was clear that the Government will continue to safeguard incomes, through the extension of the Coronavirus Job Retention Scheme and two more rounds of grants under the Self-Employment Income Support Scheme (SEISS).
Among a raft of other support measures announced by the Chancellor was the continuation of the VAT cut to 5% for hospitality, accommodation and attractions until the end of September, followed by a 12.5% rate for a further six months until 31 March 2022. This will be particularly welcome in North Wales, where tourism is such an important plank of the local economy.
Another measure that would be equally welcome here is the new Restart Grant – one-off cash payments of up to £18,000 for hospitality, accommodation, leisure, personal care and gym businesses, to help them bounce back quickly once the pandemic restrictions are lifted. At present, it is an England-only measure, but given that the Budget also announced another £740 million for Wales via the Barnett formula, the Welsh Government should quickly announce equivalent measures to apply here.
The Chancellor was frank in confirming that the massive pandemic borrowing will have to be repaid through the tax system. Personal taxes will increase, largely through a freeze on tax thresholds. Tax rates themselves will not increase.
However, corporation tax will increase from 19% to 25% from 2023, with a smaller companies rate for profits up to £50,000 (effectively preserving the current rate) and a tapered rate up to £250,000.
One eye-catching announcement, which may mitigate the corporation tax increase, was the “super-deduction”. For expenditure from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery. This effectively means that the Government will be paying companies to modernise their equipment, with a tax cut of up to 25% for every pound spent.
Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. It has played a significant role in the slowdown of productivity growth since 2008.
The super-deduction will make the UK’s capital allowance regime more internationally competitive, lifting the value of our plant and machinery allowances from 30th in the OECD to 1st, giving companies a huge incentive to re-equip with the latest plant and machinery and, in the process, equipping themselves to take on the challenges of the post-Covid world.