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Budget 2021: Rishi Sunak sets out ‘moral’ mission to limit state and cut taxes

Rishi Sunak has scaled back a cut to universal credit by £2bn a year and reduced business rates in a Budget in which he set out a “moral” mission to halt the growth of the state, cut taxes and restore fiscal discipline.

The UK chancellor arrived in the House of Commons on Wednesday armed with new official forecasts showing that Britain had bounced back from the Covid-19 crisis more quickly than expected, with growth of 6.5 per cent this year.

The improved forecasts gave Sunak a Budget “windfall” that he divided between higher spending on public services, help for people on low incomes and tax cuts in targeted areas, including business rates and alcohol duties.

He insisted he could do all this while setting out new fiscal rules committing him to balance the books for day-to-day spending by 2024-25, with debt projected to fall as a share of national income in that year.

Sunak, with one eye on a future run for the Conservative party leadership, said his determination to halt the inexorable growth of the state had a “moral dimension” and he wanted to start cutting taxes before the next election.

He said the state accounted for 50 per cent of the total economy because of the pandemic, but that a turning point had been reached. “Do we want to live in a country where the response to every question is what is the government going to do about it?” he asked.

As a signal of his desire to start unwinding the huge tax rises he announced this year to pay for Covid relief programmes, Sunak set out a range of measures to help struggling individuals and businesses.

Amid cross-party criticism of his decision to end a temporary £20-a-week uplift to universal credit, Sunak partly reversed that move by reducing the taper rate — the rate at which UC is withdrawn as earnings rise — from 63 per cent to 55 per cent at a cost of more than £2bn a year.

However, the change will not help those who receive UC and are not working, and it only partly unwinds the £6bn total cut in the top-up payments when they were ended this month.

A shake-up of business rates, including a one-year holiday for pubs, hotels and other leisure venues, was billed as the “biggest cut to business rates in 30 years” but it fell short of the major overhaul demanded by Labour.

Sunak confirmed that the “bank surcharge” on profits would be slashed from 8 per cent to 3 per cent in 2023 — the same year that corporation tax rates for all businesses rise from 19 per cent to 25 per cent. Total taxes on the banking sector from 2023 will increase from 27 per cent now to 28 per cent.

The chancellor also announced a series of reforms to alcohol taxes — including a freeze on duty increases — that his aides said would help address a cost of living crisis and help pubs. Fuel duty was frozen and air passenger duty for domestic flights cut.

Underpinning what Sunak called “a new age of optimism” were Office for Budget Responsibility forecasts showing expected economic growth of 6.5 per cent this year, up from 4 per cent previously, the fastest for 50 years.

On this trajectory, the economy will reach its pre-pandemic level at the turn of the year. With an earlier, stronger rebound, growth in 2022 is now forecast to be slightly lower, at 6 per cent.

But the more significant change is the OBR’s judgment that the economy will now settle 2 per cent below its pre-pandemic path, rather than the 3 per cent it forecast in March, implying less long-term pandemic damage. Unemployment will also peak much lower than initial OBR estimates, at 5.2 per cent.

Those forecasts allowed Sunak to claim he could spend more, cut some taxes and start to restore fiscal discipline.

Under the new forecasts, national debt would start to fall as a share of national income from 2024-25, in what could be a general election year, while he would start to run a surplus on day-to-day spending in the same year.

Gilts were on course for their biggest one-day rally since March 2020 after the government slashed its planned debt sales this year by almost £60bn, a much larger cut than markets had anticipated.

Figures from the Debt Management Office published alongside the Budget showed the government plans to sell £198.4bn of gilts in the 2021-22 fiscal year, £57.8bn less than projected in April. Investors were already expecting a reduction in bond issuance as a faster-than-expected economic recovery helped borrowing undershoot forecasts, but analysts had forecast a cut of only £34bn.

“This means a lot less supply than the market was anticipating,” said Peter Schaffrik, a strategist at RBC Capital Markets.

Ten-year UK borrowing costs fell by 0.11 of a percentage point to 1.00 per cent — reflecting higher gilt prices — the lowest level in more than three weeks, with UK government bonds also receiving a boost from a global debt rally.

Sunak said he was spending more on the government’s main priorities, including investing in skills, infrastructure and projects to help “left behind” regions in the country, in an effort to raise productivity and wage levels.

The chancellor claimed “levelling up” was a “golden thread” running through the Budget, but the government has yet to publish a white paper explaining what the policy means.

Sunak, who also announced the results of a three-year review of public spending, said total spending would rise by £150bn over the parliament, with an annual average increase of 3.8 per cent in real terms.

Among the areas to receive more money were education — Sunak said he was providing almost £2bn extra for schools and colleges — the courts service, skills training and local transport. All departments would receive a real-terms budget increase.

The overseas aid budget, controversially cut by £4bn by Sunak earlier in this parliament, is scheduled to be restored in 2024-25; but the chancellor confirmed a £2bn cut in proposed public spending on research and development in the last year of the parliament.

Rachel Reeves, shadow chancellor, accused Sunak of “living in a parallel universe” and said the government had failed to soften the cost of living crisis for millions of families this winter.

The OBR forecast inflation averaging 4 per cent this year, with households and businesses facing the immediate prospect of rising prices as well as soaring energy bills and supply shortages.

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