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UK Autumn Budget 2021 preview: What to watch this week
Chancellor Rishi Sunak presents his Autumn Budget this Wednesday. We profile some of the big issues to watch out for this October in this budget preview.
UK budget preview
The UK’s economic health
The budget is a time to reflect on where the UK has gone, economically, and where it’s going. Chancellor Sunak will be on hand to let us know the headline stats regarding employment, GDP growth, and inflation.
We know the UK economic recovery is also beginning to slow. Supply chain issues, rising unemployment in some industries, such as hospitality, and rising inflation, are all conspiring to inhibit growth.
The GDP has dropped 10% since the start of the pandemic. Bank of England forecasts suggest 2% growth in Q3 2021. Consumer price inflation stands at 4.5%.
This will fit into Sunak’s thinking and planning.
“Inflation, interest rates – those are two of the factors which I have to think about as I determine what’s the appropriate fiscal policy, what’s the right level of tax and borrowing and spending,” Sunak told the Radio Times in a recent interview.
The Office of Budget Responsibility is thought to be preparing GDP growth figures outstripping its 4% rebound shared in March. Whether this is true or not remains to be seen.
Blonde Money CEO and macroeconomics guru Helen Thomas has shared here thoughts on what could be a “Halloween horror show” for the UK this autumn:
How will the pound perform this budget?
Forex traders and general economic observers will be interested to see where sterling goes from here.
At the time of writing, GBP/USD was floating around the 1.375 level. Resistance was formed around 1.385.
Watch for where the pound goes. A strong budget could strengthen sterling against other currencies, but one that shows slumping economic growth may cause it to fall.
Taxes, taxes, taxes
With record levels of borrowing, in excess of £320bn, to keep the country running in light of the pandemic, the real question is who is going to pay for it?
The answer could be more personal taxes. Chancellor Sunak has already increased National Insurance, with contributions increasing by 1.25% from April 2022 onwards. It’s unlikely this will be enough to foot the government’s pandemic-led spending.
We could be about to see more higher levels of personal tax. There has been talk of an online sales tax percolating for a while now. It might not come this Wednesday, but it could be that the Autumn budget gets the ball rolling in this area.
There have also been calls from sectors to raise inheritance and capital gains tax too. The tax on dividends is probably going up to 1.25% too. Sunak may become the most tax-happy Chancellor in post-war Britain, but I guess extreme circumstances call for extreme measures.
Unless you’re a bank. KMPG has said it understands that Sunak will be dropping the Bank Levy from 8% to 3% by 2023. It’s a move to keep the City competitive in light of Brexit.
Although with rising fuel costs, one mooted plan to protect consumers would be a dropping of VAT on household energy bills.
That said, the government also has a green agenda to pursue. If it wants the UK to go net-zero by the middle of the century, then grants, loans, and so on will need to be put in place. How else can the government level up its green credentials? It’s estimated that the UK will lose £37bn in fuel duties every year if/when petrol-powered cars leave the roads.
Spending and borrowing
The conclusion to the UK’s 2021 Spending Review will coincide with this week’s budget too.
The Chancellor has had a lot to review. All of the UK’s support and spending programmes that originated during the Pandemic will no doubt be under the magnifying glass.
With GBP 68bn in Covid spending planned for 2021/22, the Chancellor has left little to no allowance for pandemic spending next fiscal year. COVID has not gone anywhere. In fact, it may be starting to ramp up again in the UK as the winter months roll in.
If Sunak has not left any spare cash available to anticipate a rise in COVID-19 cases, then that seems irresponsible. He may have to find some from the Spending Review or from the extra taxes and levies we discussed earlier.
There’s also the question of green spending. In order to reach that mythical net-zero status by 2050, the UK will have to spend at least £55bn a year. That means sustained solid investment in renewable energy projects and other things like proper house insulation and boiler replacement.
COP26 is looming so perhaps we’ll see more money allocated to green projects as a way of paying lip service to the UK’s climate goals.
But where there is spending there must also be cuts.
Sunak tasked all government departments to find 5% in savings going forward under this 2021/22 Spending Review.
“The scale of efficiency savings will be of immense interest when looking at the potential scale of fiscal consolidation over the next few years,” KPMG said in its Autumn Budget preview.
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