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Buoyed by better growth forecasts and less economic scarring from coronavirus than expected, British chancellor of the exchequer Rishi Sunak has delivered a giveaway UK budget stuffed with promises of higher spending and lower taxes. His speech ended with a peroration pledging his allegiance to prudence and thrift but his announcements bore the hallmark of his spendthrift next-door neighbour, Boris Johnson.
Declaring the Conservatives were now “the real party of public services”, Sunak signalled a clear break with the austerity policies of David Cameron and George Osborne. But if his spending promises were closer to the world of Tony Blair and Gordon Brown, Sunak made clear that the moral purpose behind his budget was in tune with the spirit of Margaret Thatcher.
Under pressure to keep in place a £20-a-week coronavirus uplift to universal credit, a benefit paid to the six million poorest people in Britain, Sunak took a different route. He reduced the amount of benefit recipients would lose if they get work, a change that will make a big difference to about two million, but will leave the four million poorest less well off than they were a month ago.
Sunak said he hoped to cut taxes by the end of this parliament in 2023 or 2024, but any cut is unlikely to make up for the increase in national insurance contributions he introduced this year to pay for reducing National Health Service waiting lists and to fund a new social care system.
Inflation risk
And although the Office for Budget Responsibility (OBR) painted a broadly sunny picture of the prospects for the British economy as it emerges from the pandemic, there were some clouds on the horizon too. Most notable was the risk of inflation, which the OBR said would average 4 per cent this year and could hit 5.4 per cent next year.
OBR chief Richard Hughes said that price rises meant that, despite rising wages, incomes would remain flat in real terms.
“The net effect of that is that real household disposable income per capita is not actually recovering to its pre-pandemic level until the second half of 2023. So you’re seeing a stagnation in household disposable incomes over the next few years,” he said.
A sharp and sustained increase in inflation would also push interest rates upwards, increasing the cost of government borrowing and squeezing household incomes further. And all of this is playing out against a background of falling trade with the European Union following Brexit, at the cost of tens of billions of pounds every year.