The UK October Budget – an End to Austerity?

BY MIKE JOYNER


UK Chancellor Rishi Sunak pictured on Budget day last week in Downing Street.


Last Wednesday, Rishi Sunak announced the October Budget, or at least what was left that hadn’t been leaked before. This budget marks a huge change in policy from the decade of austerity, with spending and taxes to rise drastically. While the UK public seems to support the budget, it has nonetheless been attacked for how high taxes are going to rise, and where the burden of these tax rises will fall.


Although the economy is in better shape than it was predicted to be so in March, with it being expected to return to pre-pandemic output by the end of this year, inflation is set to rise to 4% in the upcoming year. In response to this, and because Sunak is concerned that interest rates may have to rise in response to this, he wants to limit borrowing if possible. He argued that a 1% rise in interest rates would cost the government £23bn. Therefore, a recurring theme is the desire to keep borrowing down. Borrowing as a percentage of GDP is forecast to fall from 7.9% this year to 3.3% next year, and 1.5% for the next four years. Sunak has created 2 rules for keeping borrowing low: that public sector net debt must be falling, and the state should only borrow for investments, paying for everyday spending through taxation.


Taxes, therefore, have risen to the highest level as a % of GDP since 1951, from 33.5% of GDP to 36.2%. The Resolution Foundation, an independent think tank, calculates that each household will pay an additional £3000 a year in taxes, although this figure is challenged for including business taxes. Sunak argues that, as a result of the pandemic, there was no getting around raising taxes to pay for shielding and now rebuilding the economy. Yet once again, the Resolution Foundation questions this, describing most of the spending as politically motivated.


So how is all this money being spent? In a reversal to austerity, all Whitehall departments are to receive an increase in funding, totalling £150bn over the course of this Parliament. While this sounds like a lot, and it is, many of the departments will still be below the level of spending they had in 2010, or at least the equivalent. For example, spending on schools in England will return to 2010 levels by 2023, showing that while there is more money in the system, this was money that was taken away by the government over the last 10 years. The Department for Work and Pensions will spend 40% less than a decade ago in real terms, the Department for Transport 32% less and the Ministry of Justice 15% less.


Nonetheless, there are some big increases, such as £6bn for the NHS, £5.7bn for transport outside of London, and £4.8bn for local government over the next three years, to help his desire to level up. Devolved nations also get a boost, with an additional £4.6b to go to Holyrood each year, as well as £2.5bn for Wales and £1.6bn for Northern Ireland. Public sector pay can also rise, after being frozen during the pandemic, and international aid will return to 0.7% of GDP by the end of this parliament.


Other changes have been made, such as Alcohol duty being simplified greatly so that drinks are taxed depending on how strong they are. The number of rates will be dropped from 15 to 6, and in particular, the 28% levy on sparkling wine is reduced. Certain drinks, most noticeably pints of beer and cider will be cheaper, in an effort to support pubs, while stronger ciders and spirits will get more expensive, as they are seen as more harmful for public health. This will see the average pint drop by 3p, but none of this will occur until 2023.


How will these changes ultimately impact people's lives? For lower-income families, the budget is a mixed bag, and Sunak is giving with one hand while he takes with the other according to the Shadow Chancellor. The Institute for Fiscal studies goes as far as to say that low-income families will feel ‘real pain’ due to the changes. On the more positive side, the minimum wage has risen by 6.6%, well above inflation, to £9.50 an hour. Furthermore, the universal credit taper rate will fall by 8% from 63% to 55%, meaning that the rate at which benefits are withdrawn as they earn more is reduced.


However, this is against the backdrop of an additional £20 of benefits on universal credit, amounting to £1000 over the year, being cut. For some, the changes to the taper rate will more than make up the loss of £20 in benefits, but those who are unable to work will lose out the most. According to the Resolution Foundation, of the 4.4 million households on universal credit, about three-quarters (3.2 million households) will be worse off as a result of decisions to take away the £20 in benefits. But 1.2 million households would be better off by £900 a year than before the Budget. They have also stated that these policies will boost the income of the lowest fifth of houses by 2.8%, although households on the middle incomes would lose 2% of income, due to the rise in taxes and inflation, while the richest fifth will be squeezed by 3.1%.


Sunak’s lack of focus on climate change felt like complacency and is even stranger with COP26 so soon around the corner. The Green party said he clearly ‘missed the memo about us being in a climate emergency.’ Looking at air travel, in particular, Sunak has made it cheaper to travel between airports within the UK, by giving these flights a lower rate of Air Passenger Duty, although he did increase the cost of long-haul flights over 5,500 miles. Iain Blackford, described the changes as a ‘disgrace’, asking what kind of message it sent to the world on the eve of the COP26 climate summit in Glasgow. Similarly, fuel duty is frozen for a 12th consecutive year, which Sunak argues has saved motorists an average of £1900, but once again raises questions about his environmental credentials. Sunak froze it again, arguing that this is necessary to help combat the recent rise in the price of petrol, and keep it affordable, which seems like a fair point with the massive rise in prices seen in the last two weeks.


Overall, the budget seems to be much more generous than one would expect from the Conservatives, with massive spending boosts. While a lot of these spending injections are reversals to austerity, and many departments’ budgets are still lower than they were in 2010, it is a clear change in policy. The public seems to generally support the budget, and according to Savanta, with 53% saying they support the budget, including 51% of Labour voters in 2019. The shadow Chancellor described Sunak as giving with one hand and taking with the other, especially regarding benefits, although she welcomed the move to allow people to earn more before starting to lose benefits.


Many commentators on the right vehemently oppose the budget, seeing Sunak as a blue Gordon Brown, with an increase in taxes and spending. The Institute for Fiscal Studies argues that over 80% of the spending is unrelated to the pandemic. Because of this, it can be seen that this budget is an attempt to reverse and move away from the decade of austerity, as so much of the spending isn't pandemic related. This does not mean that the scars of austerity have disappeared, as is evident by the number of departments with budgets well below what they were in 2010. Yet it is a conscious decision and a step in the direction of a high spending state, akin to what was seen in the 2000s.


Image - Flickr (Number 10)