Autumn budget and spending review

Chris Smith

Image shows the Chancellor of the Exchequer, Rishi Sunak, holding the red box outside number 11 Downing Street

On 3 November 2021, the House of Lords is due to debate a government motion that “the Grand Committee takes note of the economy in the light of the budget statement”.

Autumn Budget

Aims and overall effect

The Government said that the budget took place in the context of an economic recovery from the coronavirus pandemic and the winding down of government support mechanisms. It was intended to support the Government’s aim to “build back better”, which it sought to do by “investing in strong public services, driving economic growth, leading the transition to net zero and supporting people and businesses”.

HM Treasury provided an assessment of the effect of all tax and spending decisions announced since the March 2021 budget. It said that, overall, these amounted to a fiscal loosening (ie a net cost to HM Treasury) of £25.3 billion in 2022/23, £21.9 billion in 2023/24 and then £9.8 billion, £7.5 billion and £7.7 billion respectively in 2024/25 to 2026/27. As well as measures in the budget, these figures include several large pre-announced policies. For example, they incorporate the effect of the health and social care levy, and associated spending, and the ‘double lock’, rather than triple lock, uprating of state pensions.

The Office for Budget Responsibility (OBR) noted that policy measures since March 2021 consist of net tax increases that will raise £16.7 billion a year by 2026/27, combined with an increase in public spending that will amount to £22.9 billion per year, again by 2026/27. The OBR said these would result in:

the highest tax burden since the 1950s, at 36.2% of GDP;
the state representing its largest sustained share of GDP since the 1970s, at 41.6%; and
the largest increases in taxes in a single year since 1993.

As well as additional receipts from increasing taxes, the OBR said the public finances would benefit, by about £35 billion per year, from improved economic forecasts. Together, these factors boosted receipts by around £50 billion a year. The OBR said that the Government was using around £30 billion of this to increase public spending and the remainder to reduce borrowing.

Tax measures

The OBR said that the main tax policy change since the March 2021 budget was the health and social care levy, announced in September. It said this would raise £18.2 billion per year by 2026/27. Additional tax measures in this budget included:

An extension of the freeze on fuel duty for a further year, costing the Government approximately £1.6 billion per year.
Reforms to the system of alcohol duties to make duty more proportionate to alcohol content, together with a freeze in alcohol duty rates for 2022/23. Together, these measures will cost approximately £600 million to £700 million per year.
Several measures on business rates, including: reforms to the system overall, intended to make it “fairer, more responsive and more supportive of investment”; freezing the business rates multiplier for 2022/23; a 50% relief for retail, hospitality and leisure companies for 2022/23; and other targeted reliefs. Together, these measures will cost approximately £2.7 billion in 2022/23 and around £1.0 billion to £1.2 billion in future years.
Reducing the bank surcharge in corporation tax from 8% to 3% on 1 April 2023 and increasing the threshold over which it is paid. This will cost £830 million in 2023/24, rising to £1.0 billion in 2026/27. The chancellor said that the reduction in the rate was in light of the forthcoming increase in the main rate of corporation tax and the need to maintain the competitiveness of the UK’s financial services sector.
Introducing a new tax of 4% on the profits made by the largest property developers on their UK residential property activities.
An extension of the higher £1 million annual investment allowance to March 2023, at a cost of £400 million between 2023/24 and 2024/25, but with some savings in later years.

The Government also announced a further consultation on introducing an online sales tax, which it said would be used to reduce business rates for ‘bricks and mortar’ retailers.

National living wage, employment support and public sector pay

The budget confirmed a further rise in the national living wage (NLW), from £8.91 to £9.50 an hour from 1 April 2022—a 6.6% increase—and uplifts to other rates of the national minimum wage. The Government said the increase was consistent with its aim for the NLW to reach two-thirds of median earnings by 2024.

The Government also announced changes to universal credit (UC) that it said would “help people progress in work and allow working households […] to keep more of what they earn”. The changes will increase, by £500 a year, the level of earnings above which UC begins to be withdrawn (the ‘work allowance’). This increase will apply to households with children or with someone who has limited capacity to work. The second change in UC was to reduce the taper rate at which UC is withdrawn above the work allowance. This will mean that for every £1 earned, the recipient will lose 55p of UC, rather than 63p under the previous system.

The Government said the UC changes would cost £2.2 billion per year. Commentators have argued that they only partially make up for the withdrawal of the £20 a week uplift implemented during the pandemic, and that they will not benefit the poorest, non-working, recipients of UC.

The budget announced that public sector workers would receive pay rises over the next three years, lifting the pay freeze for most workers implemented in the 2020 spending review. The Government said it would seek recommendations on the appropriate rates of increase from pay review bodies. Its guiding principles in setting public sector pay would be that growth should “retain broad parity with the private sector and continue to be affordable”.

Spending review

Spending reviews set out the Government’s long-term plan for some of its expenditure. They usually take place every two to four years. However, the previous two reviews covered just one year each: the 2019 review, because of the change of Prime Minister, and the 2020 review because of the pandemic.

The 2021 spending review (‘SR21’), announced alongside the budget, covers government spending from 2022/23 to 2024/25.

Overall spending

In total, departmental spending is set to grow by 3.8% per year in real terms on average to 2024/25. This would mean that 2024/25 spending is around £90 billion per year higher in real terms compared to 2021/22. The OBR described this as a “large and sustained increase in departmental resource spending”.

Departmental spending

The Government stated that the spending review delivers real term increases in every department’s budget. However, in cash terms, the National Health Service (NHS) benefits from the largest increases. Between 2021/22 and 2024/25, total annual funding for the Department of Health and Social Care (DHSC) will increase by £32 billion, an average annual growth rate of 4.1% in real terms. The Institute for Fiscal Studies commented that DHSC will receive 44% of all the cash increases announced in SR21.

The Department for Education received an average increase in real-terms funding of 2.0% per year between 2021/22 and 2024/25. The Government said this will fund a number of initiatives, such as: an additional £4.7 billion for the core schools budget in England; an additional £1.8 billion to recover lost learning as a result of the pandemic; £3.8 billion per year by 2024/25 for skills, including increased apprenticeship funding and 100,000 additional classroom hours for T-Level students; and additional school places for children with special educational needs and disabilities.

The Department for Levelling Up, Housing and Communities received an average 4.1% real terms increase per year. This includes funding for initiatives such as the levelling up fund, the community ownership fund and the UK shared prosperity fund. It also confirmed a settlement of £24 billion for housing up to 2025/26, including £11.5 billion for affordable housing and £5 billion to remove unsafe cladding. The Government stated that a levelling up white paper will be published later in 2021, with further details of its plans in this area.

Local government received £4.8 billion of new grant funding over the spending review period. Taking into account its other sources of receipts (principally, council tax and business rates), core spending power for local authorities is expected to rise by an average of 3.0% per year in real terms. Much of this is intended to fund reforms to social care. Local authorities will also be compensated for reduced income from business rates due to the reliefs and freezes announced in the budget, summarised in the section above on tax measures.

The Department of Transport received real-terms annual increases of 1.9% on average. This includes: £35 billion of rail investment; £24 billion for “strategic road investment” (between 2020 and 2025); £3 billion for buses, over the current parliament; £2 billion for investment in cycling and walking initiatives; £5.7 billion for city region sustainable transport settlements; and an additional £1.1 billion to support the decarbonisation of transport.

The Department of Business, Energy and Industrial Strategy received average real-terms increases of 7.5%, mainly in its capital allocation. This is particularly intended to increase public investment in research and development (R&D) and encourage innovation. It also included £15 billion over the SR21 period to support the net zero strategy, for example by subsidising energy efficiency and clean heat insulation.

Other departmental announcements included average real terms annual increases of:

3.3% for the Ministry of Justice. This includes £477 million over three years to tackle backlogs arising from the pandemic, and £3.8 billion of capital investment to deliver 20,000 new prison places.
1.9% for the Home Office. This includes funding to recruit 8,000 police officers and upgrade systems at the UK border.
4.4% for the Foreign, Commonwealth and Development Office, to support the goals of the Integrated Review of Security, Defence, Development and Foreign Policy. In addition, SR21 set aside provisional funds to allow overseas development assistance (ODA) to return to 0.7% in 2024/25. The Government has said it would reinstate ODA spending at this level if its fiscal rules are met. On current forecasts, this will occur in 2024/25 (for further detail, see the section on fiscal rules, below).
5.8% for the Department for Culture, Media and Sport. This includes investing in gigabit broadband and support for the heritage and sport sectors.
5.3% for the Department for Environment, Food and Rural Affairs. Projects will include implementing the 25 year environment plan, reducing biodiversity loss and combatting flooding.
4.4% for the Department for Work and Pensions, including a range of initiatives to support people getting back into work.
2.2% for the Northern Ireland Executive, 2.4% for the Scottish Government and 2.6% for the Welsh Government through the Barnett formula for funding the devolved administrations.

The Government also said the spending review will deliver efficiency savings of 5% in central government departments by 2024/25.

The Ministry of Defence had previously received a four-year settlement in the 2020 spending review.

Distributional analysis

As usual, the Government published an analysis of how the budget and spending review would affect households in different parts of the income distribution. Among its conclusions were:

The support schemes implemented during the pandemic, such as the furlough, the self-employment income support scheme and temporary welfare uplifts were more generous to lower-income working-age households, as a percentage of income.
Also as a percentage of income, and excluding coronavirus support schemes, the cumulative effect of tax and spending decisions since the 2019 spending review would benefit the lowest income households the most.

Environment

SR21 and the budget contained a range of measures to support its aim to reach net-zero UK greenhouse gas emissions by 2050. A number of these were described in the section above on departmental spending settlements. The Government also reconfirmed its target of a 46% cut in emissions by 2030.

The Government’s overall net zero strategy was also published the week before the budget.

There was no overall assessment of the environmental impact of the budget and spending review, or of individual elements of it. Green campaigners have criticised elements such as the reduction of air passenger duty on internal UK flights and the freezing of fuel duty.

Economic forecasts

The OBR’s latest economic forecasts covered the years to 2026/27.

Economic growth

The OBR said that the economy has recovered faster than expected from the pandemic. It attributed this to the success of the vaccine rollout and to “consumers’ and businesses’ surprising degree of adaptability to public health restrictions”. The OBR forecast that output would grow by 6.5% in 2021, an upgrade from 4.0% in its March forecast. As a result, it now expects output to return to pre-pandemic levels by the end of 2021. However, from 2023 onwards growth is estimated to return to lower levels.

**Table 1: UK real GDP growth, 2020 and forecasts to 2026**
%	Actual	Forecasts
%	2020	2021	2022	2023	2024	2025	2026
Real GDP growth	-9.8	6.5	6.0	2.1	1.3	1.6	1.7

(Office for Budget Responsibility, Economic and Fiscal Outlook, 27 October 2021, CP 545, p 14)

The OBR also said it had reduced its estimate of the longer-term impact of coronavirus on the economy (“scarring”) from 3% to 2%. This resulted in improved forecasts for real GDP growth in future years. However, the OBR noted that uncertainty around the level of scarring remained high.

The OBR maintained its estimate that Brexit would reduce the size of the UK economy by 4% in the longer run.

Public sector deficit

The budget reported that the public finances were stronger than anticipated at the time of the OBR’s March 2021 forecast. However, it noted that “borrowing and debt remain at historically high levels”.

The public sector deficit is the difference between public sector spending and income in each year. The OBR said that the improved outlook for growth and employment had a significant impact on its forecast for government borrowing. It now expects the deficit to be £183 billion in 2021/22, £51 billion lower than the estimate it made in March 2021.

The projected deficit falls for the remainder of the forecast period, reaching £44 billion in 2026/27. Figure 1 illustrates the path of the government deficit since 1999/00 and includes the OBR’s forecasts to 2026/27. It compares the latest forecast with that contained in the spring 2021 budget.

Figure 1: Public sector net borrowing

Figure 1 -graph showing public sector net borrowing since 1999/00, comparing the autumn budget forecast with the previous, March 2021, forecast]

(Office for Budget Responsibility, Economic and Fiscal Outlook, 27 October 2021, CP 545, p 17; and Office for National Statistics, ‘Public sector net borrowing, excluding public sector banks: series DZLS’, 21 October 2021)

Considering only the current budget (day-to-day spending, excluding investment, compared to receipts), this improves from a deficit of £247 billion in 2020/21 to a small surplus in 2023/24. This surplus is then forecast to increase to £33 billion in 2026/27. This is significant because the current budget is the target of one of the new fiscal rules (see section below).

Public sector debt

The public sector debt is the total stock of borrowing resulting from past deficits, to the extent that they have not yet been repaid.

The lower projected borrowing, described above, leads to lower forecasts of overall debt. The OBR said that the debt would peak at 98% of GDP in 2021/22. It would then begin to fall, reaching 88% in 2026/27.

Figure 2 shows the path of the Government’s debt, relative to GDP, since 1999/00 and including the OBR’s forecasts to 2026/27. It compares the latest forecast with that contained in the spring 2021 budget.

Figure 2: Public sector net debt

Figure 2 - graph showing public sector net debt since 1999/00, comparing the autumn budget forecast with the previous, March 2021, forecast

(Office for Budget Responsibility, Economic and Fiscal Outlook, 27 October 2021, CP 545, p 17; and Office for National Statistics, ‘Public sector: net debt (excluding public sector banks) as a % of GDP: not seasonally adjusted: series HF6X’, 21 October 2021)

These figures include the effect of the Bank of England’s ‘term funding scheme’, which lends money to banks and building societies at interest rates very close to the bank rate in order to support the economy. “Underlying” debt, excluding the scheme, is forecast to have already peaked at 86.1% of GDP in 2020/21, and to fall to 83.3% in 2026/27. Again, this measure is significant because it features in one of the new fiscal rules.

Fiscal rules

The budget introduced a new set of fiscal rules, which aim to keep public spending and the national debt sustainable by setting limits on certain variables. They are contained in a new Charter for Budget Responsibility. The new framework consists of a ‘primary mandate’ and three ‘supplementary targets’. The charter also sets out other factors that the Government will consider when setting fiscal policy.

The primary mandate is:

Underlying UK debt (excluding the Bank of England’s term funding scheme) to be falling by the third year of the forecast period. This is a rolling target, meaning that current fiscal policy must be set so the OBR’s forecast at any time, taking into account current policy, must be for debt to be falling by the third year of that forecast.

The supplementary targets are:

The current budget (excluding investment spending) to be in balance by the third year of the forecast period, again on a rolling basis.
Public sector net investment to be less than 3% of GDP on average over the forecast period.
Expenditure on welfare to be contained within a cap and margin set by HM Treasury.

The debt target in the primary mandate is different to that which the Government said it would introduce in the 2019 Conservative Party general election manifesto and the December 2019 Queen’s Speech. In those documents, the fiscal rule was envisaged to target the cost of debt interest payments. In the new framework, the affordability of debt is just one of a number of other “indicators to be considered”, along with, for example, the size of the wider public sector balance sheet.

The OBR’s current forecasts imply that all the fiscal rules will be met following the budget. However, the OBR said that there was only “modest” headroom on the debt target, which could be wiped out by 1% lower growth or higher interest rates.

Discussing the affordability of government debt, the OBR noted that the cost of debt interest payments has fallen sharply, despite increases in the level of debt. For example, it said interest payments have fallen from 3.8% of GDP in 1980/81 to 0.9% in 2020/21, despite debt increasing from 40% to 97% of GDP over the same period. The reduced cost is due to lower interest rates and, to a lesser extent, the degree to which government debt is now owned by the Bank of England. However, both the OBR and HM Treasury stressed how sensitive the public finances now are to changes in interest rates. HM Treasury said that the fiscal impact of a one percentage point increase in rates would be six times greater than it was before the financial crisis, and double what it was before the pandemic.

Unemployment and earnings

The OBR’s forecasts for unemployment have also improved. It now believes that unemployment will peak at 5.2% in the fourth quarter of 2021. This compares to an expected peak of 6.5% at the time of its March 2021 forecast—equivalent to 460,000 fewer people being unemployed. It attributed this to faster than expected growth and the “remarkably successful” government support schemes during the pandemic. The OBR estimated that unemployment would settle at around 4.2% in the medium term.

The OBR also revised up its forecasts for average earnings growth in 2021 and 2022, to 5.0% and 3.9% respectively. It attributed this partly to “tightness” in the labour market, evidenced, for example, by record levels of vacancies.

Inflation and disposable income

The strength of the economic recovery, together with supply constraints, including as a result of Brexit, led the OBR to predict that inflation will rise in 2022. It forecast inflation would peak at 4.4% in 2022. However, it noted a risk it might exceed 5% and that recent data exacerbated these concerns.

Because of these higher inflation rates, the OBR forecast that households’ spending power, measured by real household disposable income, would rise slowly over the forecast period. The estimated increases are between 0.3% (in 2022) and 1.5% per year. Both the Institute for Fiscal Studies and the Resolution Foundation commented on a forthcoming “squeeze” in living standards (see links in the read more section).

Political reaction

Replying to the budget, the Shadow Chancellor, Rachel Reeves, said that the Government was presiding over the highest sustained tax burden in peacetime and that this would impact working people. She also argued that, under the Conservative Government, the UK had become a “low-growth economy”. As a result, she contended that “families struggling with the cost of living crisis; businesses hit by a supply chain crisis; those who rely on our schools, our hospitals and our police” would not recognise the positive picture of the economy painted by the chancellor. Ms Reeves called for higher taxes on those higher up the income distribution, a replacement for business rates that fairly taxed online companies and climate investment of £28 billion per year for the rest of this decade.

The Westminster Leader of the Scottish National Party, Ian Blackford, said that the budget measures did not “even come close” to compensating for other recent policies, such as the health and social care levy and the proposed suspension of the triple lock on state pension upratings. As a result, he argued that there will be a “cost-of-living crisis” and “millions of families and workers will be worse off this winter”. He called for the £20 per week uplift in universal credit to be reinstated and for additional support for Scottish businesses.

For the Liberal Democrats, Christine Jardine called for more funding for catch-up measures in education and a £150 billion “green recovery plan”.