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UK chancellor Rishi Sunak addressing a press conference.
UK chancellor Rishi Sunak after his March 2021 budget. PA Images / Alamy Stock Photo

Budget 2021: austerity by stealth will repeat the mistakes of 2010s all over again

There was room for some optimism in Rishi Sunak’s budget. The UK’s GDP is forecast to return to its pre-pandemic level by the middle of 2022, six months earlier than previously predicted. And after nearly a year of record borrowing, the chancellor felt compelled to continue funding business and employment recovery through support grants and the furlough scheme.

The bright side of the worst economic downturn in 300 years is the expectation that it will be followed by the sharpest upturn in half a century. And despite a lower government deficit than previously predicted, it’s still a massive 17%, and talk has turned to fixing the economy and “levelling with people” about future prospects.

To achieve that fix, it would be risky to rely on historically low interest rates, which have made it so easy (and cheap) for the government to borrow. Instead, the chancellor clearly intends to pursue recovery through private sector growth (ideally, green). If this can be achieved, the debt of the last 12 months can be mitigated in years to come as its real value declines in relation to a growing tax take from increased economic activity.

Read more: Budget 2021: experts react

On the subject of tax, Sunak’s announcements included a corporation tax rise to 25% in 2023 for the largest companies. This is welcome after years of it being lowered, and, given the objections he will have faced, it is also bold. The lower rates offered to smaller businesses making less than £250,000 in pre-tax profits are also fair.

With incomes, the five-year freeze in personal allowance (£12,570 from April 2021) would make more sense if if did not include the lower paid. And while the wealthier are being asked to pay more through the freeze in the higher rate threshold (£50,270 from April), a broader rethink on income bands and thresholds could be used to implement a more progressive system of taxation. In Scotland, for example, there has been an increase in the number of bands.

Some have suggested that the UK budget will mean the country faces the highest rate of tax in 50 years, but it is important to clarify what this means. For instance, after being introduced by a Labour government in 1965 (at a rate of 40%) the 1980s saw corporation tax rates decrease, initially from 52% to 35% for the main rate, and 40% to 25% for smaller companies.

So Sunak’s announcement of a move to 25% from the current 19%, while fairly dramatic in scale, is much lower than some of the rates we’ve seen since corporation tax was introduced. And for income tax, the basic rate of 20% remains much lower than previous levels. Claims of historic highs are to do with the “tax burden”, the share of GDP made up of taxes, rather than the actual rates imposed.

Lessons from austerity

It is also worth taking a step back to look at the effects of past economic policies in response to crises. While the numbers and magnitudes may vary, society has of course faced other extraordinary economic events.

Following the banking crisis of 2007-09, for instance, the UK government imposed a period of austerity which prompted questions about both its effectiveness as an economic management tool, and the effects on the vulnerable in society. Despite rhetoric of “fixing the roof”, and “magic money trees”, there is a strong argument that austerity actually hinders recovery.

In parallel, over the past decade, population health indicators such as life expectancy have faltered. Years of annual improvement ended in 2011, while for some groups it actually reversed.

The gap in life expectancy between rich and poor has since continued, with the UK currently the fifth most unequal nation in the world (behind Costa Rica, Chile, Mexico, Bulgaria and the US). The austerity of the 2010s failed at both growing the economy and enhancing the welfare of the population.

Rough sleeper in sleeping bag on Westminster bridge, London.
A rough sleeper in London during lockdown. Guy Corbishley / Alamy Stock Photo

More recently, the UK has experienced the fourth highest death rate (per million) from COVID-19 out of 132 countries. As has been pointed out by Sir Michael Marmott, director of the Institute of Health Equity, this is at least in part down to pre-existing poor health in poorer sections of the population.

There is a strong case therefore for learning from the past and avoiding falling into the trap of an austere response to difficult times. Sometimes circumstances override a disproven and flawed political ideology.

The pandemic has no doubt destroyed whatever plans this government had previously for tax and spending. In 2020, a Conservative chancellor, barely in post, had to levy the biggest borrow-and-spend initiative the UK has ever seen.

But what happens after the support schemes end and the “levelling with the public” really begins? Given the ongoing problems in health, social care, wellbeing and income, and the effects so starkly brought to light during the pandemic, the government needs to be bold enough to try an alternative to the failed route of austerity. Yet as the Institute for Fiscal Studies has pointed out since the budget, it appears to be heading in exactly the opposite direction, with departmetal cutbacks (or more tax hikes) necessary to balance the books in years to come.

By avoiding austerity, the economy might this time recover sooner, and social inequalities might be addressed. Policies for progressive income and corporation taxes and protecting welfare would be a start. Sunak’s hand has been forced by an extraordinary pandemic for now, and there are worrying signals about whether his appetite for public investment will continue. We’ve been here before.

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