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Autumn Budget and Spending Review

Autumn Budget and Spending Review

Ciaran Gunne-Jones 27 Oct 2021
You’d be forgiven for thinking that there wasn’t much left for Rishi Sunak to announce at today’s Budget – his second this year – given the degree of pre-briefing by HM Treasury officials and various ‘leaked’ announcements over recent days. But such was the packed agenda – new forecasts from the Office for Budget Responsibility (OBR), the outcome of the delayed departmental Spending Review as well as the Autumn Budget itself – it was perhaps inevitable in order to create as much airtime as possible. One of the most important elements of all the early news was actually last week’s figures from the Office for National Statistics that revealed a reduction in government borrowing levels (£7 billion less than last year’s high water mark, but the second highest since the early 1990s), largely reflecting the rebound in economic growth and strong labour market over recent months boosting tax receipts for the Treasury. Coupled with upward revisions by the OBR to UK economic growth forecasts (6.5% for 2021, up from 4%) released today, the Chancellor found some extra room to manoeuvre than he might have expected back at the time of the March Budget. The quicker than expected rebound does mean that growth in 2022 is now forecast to be slightly lower, at 6%. Notwithstanding, the state of the public finances is still far from straightforward. The public sector’s net debt excluding public sector banks amounted to £2.2tn in September, equivalent to about 95% of the country’s entire gross domestic product, a proportion last seen in the early 1960s. While the OBR is now taking a more optimistic view on the long-term effects of the pandemic on the economy – cutting its estimate of the “scarring” effects from 3 to 2% of GDP – which will also give some more fiscal headroom, other factors still risk clouding the outlook, such as rising interest rates which could substantially increase the costs of servicing that debt. And all that comes before the various extra spending commitments that had already been made over recent months, for example to the NHS. However, the Chancellor was keen to focus on what he described as “an economy fit for a new age of optimism” following the pandemic. Of course, this was his cue for talking about how to get the government’s policies around regional policy, housing, regeneration, infrastructure and innovation and net zero on track – all of which, the government contends, are critical opportunities for its wider levelling up agenda. Key announcements in this regard include: Levelling up funding – £1.7 billion of funding was announced for 105 places to upgrade local infrastructure through the first bidding round of the £4.8 billion Levelling Up Fund. This includes projects in all regions and devolved administrations, which we have analysed in more detail in a separate blog. UK Shared Prosperity Fund – the UKSPF will be worth £2.6bn over the next three years as the successor to the EU Structural Fund programme addressing local needs across the UK. The UKSPF will rise to £1.5 billion a year by 2024-25. Government is committed that total funding through the UKSPF will, at a minimum, match the size of previous EU Funds in each nation and in Cornwall, each year. Brownfield land – £300m grant funding was announced that will be distributed to Mayoral Combined Authorities and local authorities to unlock smaller brownfield sites for housing and improve communities in line with their priorities. This follows the Prime Minister’s recent call for more housing to be delivered on brownfield land. Business rates – following the publication of the long-awaited business rates review, the multiplier for calculating business rates will be frozen for 2022 and 2023, saving businesses a total of £4.6bn over the next five years. Additionally, revaluations will move to every three years from 2023 (currently every five years). A new 50% business rates discount for businesses in the retail, hospitality, and leisure sectors in England (worth £1.7 billion) was also announced for 2022-23. Business rates raise about £25bn in England each year, but the Treasury has indicated that it will also consider a future online sales tax to raise revenue that could fund a potential reduction in other business rates. Residential property developer tax – the new tax to be levied on developers from April 2022 (and expected to run until 2032) was confirmed as part of the government’s wider plan to bring an end to unsafe cladding in February 2021. The tax will be charged at 4% on profits exceeding an annual allowance of £25 million (profits to be calculated using an activity-based approach on trading profits) through the Corporation Tax process. In addition, a new levy will be applied when developers seek permission to develop certain high-rise buildings in England. Build to rent activity will be excluded from the new tax. Regional transport – £5.7 billion over five years was confirmed for City Region Sustainable Transport Settlements, subject to the creation of appropriate governance to agree and deliver funding. This will fund projects such as the Sheffield Supertram renewal and the Wednesbury to Brierley Hill metro extension in the West Midlands. As is often the case with infrastructure spending announcements, there is some debate about how much of this constitutes “new money” with an estimated £4.2bn of this funding having already been announced in the 2020 Budget. Digital planning – an additional £65 million investment to improve the planning regime, through a new digital system with the intention that this will ensure more certainty and better outcomes for the environment, growth and quality of design. This is very much in the spirit of last year’s White Paper on the future of the planning system, but the Budget was silent on planning reforms more generally. Freeports – the first designated tax sites have been confirmed at the Humber, Teesside and Thames Freeports, and which will be able to begin initial operations from next month. This follows the announcement in March to establish eight Freeports across England, while there also remains a commitment to also establishing at least one Freeport in Scotland, Wales and Northern Ireland. DLUHC departmental budget – the Spending Review settlement for the freshly renamed Department for Levelling Up, Housing and Communities (DLUHC) provides a £2.6 billion budget increase over the Parliament to £8.9 billion in 2024-25, which represents an annual average 4.7% increase in spending above inflation. This is higher than for the overall departmental spending which is set to grow in real terms at 3.8% a year on average over this Parliament. In part, it reflects that the new UKSPF falls within the DLUHC budget. Devolution deals – the Budget confirmed that the forthcoming Levelling Up White Paper will outline the government’s plans to enable more areas to agree ambitious devolution deals, where there is local support, and to strengthen existing devolution arrangements to ensure local leaders can deliver. There was no reference to the outcome of the ongoing review of Local Enterprise Partnerships.    Image credit: rishisunakmp on Instagram  

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Budget 2021: Rishi’s moment of challenge and change
There’s no doubt that Rishi Sunak’s relatively short tenure at No 11 Downing Street has been a challenge. At the time of Budget 2020 (remember that?) in March last year, Sunak had been in the job for just three weeks – and within three of weeks of delivering his statement, the full impact of COVID-19 started to unfold as the country entered lockdown. The ensuing recession – the deepest in the UK for 300 years – means we’ve heard much more regularly from the Chancellor over the past 12 months than might typically be the case, as various phases of the government’s support package have been rolled out, and then rolled out again, under the promise of “whatever it takes”. But the resulting paradigm shift in the fiscal landscape can perhaps most easily be summed up as follows: in March 2020, the Chancellor set aside £12bn to provide support for public services, individuals and businesses whose finances have been affected by COVID-19; the actual cost so far has been around £280bn. Beyond the numbers, the pandemic has, naturally, also stalled much of the government’s wider economic policy agenda, such as the manifesto commitment to “levelling up” areas across the country. Many earlier announcements, such as the planned Comprehensive Spending Review, have also been pared back. So it was against this backdrop that the Chancellor delivered his second Budget this week, which he summed up as a “moment of challenge and of change”. It had been widely trailed that the government would pursue a ‘spend now…but pay later’ approach when faced with the highest level of public borrowing since the Second World War; the effect of the further COVID-19 support measures announced will take the total bill to £407bn. The Chancellor is taking a calculated risk that the economy will be on the mend and growing again at the point that various new tax rise measures start to bite over the next few years. In this respect, the Office for Budgetary Responsibility (OBR) brought some good news in their latest outlook – GDP is now expected to grow by 4% in 2021 and to reach its pre-pandemic level by mid-2022, six months earlier than had previously been expected. The OBR warned, however, that they expect the economy to be 3% smaller in the medium term compared to its pre-COVID path – in part due to recent falls in net migration. But the Chancellor wants more than an economic recovery that is set to autopilot, stating: “it’s not enough to have some general desire to grow the economy…we need a real commitment to create jobs where people are and change the economic geography of this country.” The tone was set for change, including addressing the challenges of long-term green growth and levelling-up. On the latter, Rishi Sunak is starting close to home – by confirming the move of 750 HM Treasury officials to Darlington as part of the “Treasury North” campus. The Budget was accompanied by the publication of Build Back Better: our plan for growth, a policy paper which sets out the government’s plans to support economic growth through investment in infrastructure, skills and innovation – it effectively provides a new framework that supersedes the 2017 Industrial Strategy as the central policy reference point. This paper also details a series of new funding arrangements, and confirmed that the long-awaited UK Shared Prosperity Fund will arrive in 2022 to replace European Union structural funds as they expire after 2022-23. More immediately, government launched a new Levelling Up Fund worth £4.8bn until 2024-25, with a first round focused on local transport projects, town centre regeneration, and culture and heritage – the deadline for competitive submissions by local authorities is 18 June 2021. For this purpose, every local authority in the country has been placed into one of three levels of priority group – as shown on the map below – with preference to be given to bids from higher priority areas based on their need for economic recovery and growth, need for improved transport connectivity and need for regeneration. The exact details of how government arrived at this prioritisation have not yet been released, and a number of criticisms have already been levelled at some of the categorisation reported in the media. Potential candidate projects for funding are expected to align with relevant Local Plans, Local Industrial Strategies or Local Transport Plans. Other key announcements included: the creation of the first ever UK Infrastructure Bank to be headquartered in Leeds that will focus (at least initially) on investments to tackle climate change and support regional economic growth, and that will have a degree of operational independence from government; the latest round of confirmed Town Deal settlements for 45 towns nationally; the designation of eight Freeport locations[1] across the country which will be eligible for tax incentives to attract investment, easier customs processes and simplified planning measures; the terms of reference for a new study from the National Infrastructure Commission (NIC) on how to maximise the benefits of infrastructure policy and investment for towns – with an emphasis on transport and digital – to report by September 2021; and a signal that there could be further change on the way for Local Enterprise Partnerships (LEPs), as government indicated it would be looking at the future role of LEPs, including their geographies, over the coming months and will announce more detailed plans ahead of the summer recess. Ultimately, this was a Budget very much defined by the long shadow of the pandemic on the state of the public finances, even at this moment when there is more confidence about the way ahead and an economy that can start to grow again. But it was also about the Chancellor attempting to kick start the government’s longer-term economic policy programme and delivering against its political commitments.   [1] East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames, Teesside. Image credit: @rishisunakmp via Instagram   

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