The Autumn Budget: A Big Squeeze?

By Jacob Joad

For a Conservative government, one may be forgiven for rubbing their eyes at the sight of the recent budget. It has meant that Britain now has its highest levels of taxation since the 1950s and its greatest increase in public expenditure in fifty years. The budget is emblematic of the wider dilemma facing the Conservatives, having to appease a voter base transcending the ‘North-South divide’ that has characterised British politics since the 1980s. Feeling comfortable in the South despite its by-election pushbacks since the 2019 General Election, Sunak’s 2021 budget indicates that it is determined to retain voters from the Red Wall by ploughing on with the ‘levelling-up’ agenda, particularly in the wake of the damage caused by the lockdown measures taken during the COVID-19 pandemic. 

Adding to this are the moves designed to revive the post-Brexit trade environment with Europe, through tax breaks on certain products imported from EU nations. The turbulent times ahead, particularly with the forecasts of high inflation and substantial utility bill rises, makes 2021 an interesting time for the Chancellor to begin preparations for a spending crusade. But there is logic to the decisions made in this Budget, and time will tell if 2021 was the correct year to restart the levelling up pledges.

The pandemic undoubtedly put a substantial wedge in the gears of Conservative policy. Just before the COVID-19 hit, the government made an ambitious and irrevocable commitment to HS2, a project now set to cost over £100bn. Then the measures taken during and after the lockdowns since 2020 have only heaped on expenditure, with the furlough scheme costing almost £66bn since April 2020 (Statista) and the ‘Eat Out to Help Out’ programme carving an additional hole out of the Treasury. Designing a budget to respond to these problems and provide the government with enough revenue to carry out its levelling-up agenda would be a difficulty for any government, regardless of their political leanings, but for the party associated with low tax, this is all the more problematic. 

The change that has attracted the most ire from voters is the increase to National Insurance Contributions. The Health and Social Care levy will add 1.25% in tax on earnings for most employees and employers across the UK. Though it is technically a circumvention of increasing direct income tax, voters are not fooled that it will be hitting their pockets. Employees will be hit the hardest, facing twice as large an increase in tax compared to the self-employed due to the effects of the NIC classification system. However, the government estimates that this alone will raise some £12bn per year on average, which will help fund projects to revitalise infrastructure and public services, particularly healthcare given the levy’s title. 

More positive changes for individuals are the cuts to the universal credit taper rate and the increase in the national living wage. The former is set to be reduced from 63% to 55%, likely to compensate for the withdrawal of the £20 per week uplift. The latter is being increased by 6.6% to £9.50 per hour. These changes ostensibly target the working-class voters who formed the core of the support instrumental in smashing the ‘Red Wall’ for the Conservatives, whilst the National Insurance changes mean that middle-class workers will be hit with tax increases, potentially leading to a continuation of the trend of Southern voters slowly abandoning the Conservatives for the Liberal Democrats, who have seen surges in support in the South over the past 18 months.

Aside from taxes on individuals, several taxes on corporations and industries are set to be overhauled. the Chancellor confirmed that corporation tax will increase to 25%, though this is offset for banks by the cut in the bank corporation tax surcharge by 5%, in addition to a rise in the surcharge’s allowance from £25m to £100m. Further, a Residential Property Developer Tax of 4% is set to be introduced from next April, which will act as an extension to corporation tax, payable on profits from residential property development above £25m in value. To help the maritime industry, the UK tonnage tax that has remained largely untouched since 2000 is set to be overhauled to attract overseas shipping groups to the UK, responding to the increased autonomy offered in this area by the UK’s departure from the European Union. To help the creative sector, a repertoire of tax reliefs for this sector are being either extended, increased or created, designed to foster a post-COVID rejuvenation of the arts, which has shared with the high street the brunt of the damage caused by lockdowns over the past 18 months. 

These tax changes are a welcome sight for some, though the Institute for Fiscal Studies has warned that the overall effect of the changes will result in middle earners losing some of their take-home pay, as a result of both the tax changes and inflation forecast. Nevertheless, the government does seem to be working towards its levelling up agenda in its expenditure promises, pledging £6bn to help NHS backlogs, £7bn for transport projects in cities and communities in the North of England, and £1.7bn for the ‘Levelling Up Fund’ specifically. The critical question will be whether such spending promises are enough to repair the damage brought about by the coronavirus pandemic. 

Regardless of the specifics, however, such funding pledges will be seen as a step in the right direction for the Northern Conservative voter base, particularly with the targeted funding for transport infrastructure in the North. Whether this will be enough to retain voters is yet to be seen. What is likely, though, is that this budget will leave a sour taste in the mouths of Conservatives in the South of England.