ourEconomy: Analysis

Rishi Sunak said he’d protect the vulnerable. So why is he making them pay?

The chancellor is fuelling a two-tier recovery, where the winners from the pandemic prosper at the expense of everyone else

Laurie Macfarlane
4 March 2021, 11.08am
Chancellor of the Exchequer Rishi Sunak delivering his Budget to the House of Commons. Wednesday March 3, 2021.
House of Commons/PA Wire/PA Images

When COVID-19 emerged last year, some predicted the virus would be a ‘great leveller’ – a rare event that reduces the gap between rich and poor and creates a more equal world. But things haven’t quite turned out this way.

The pandemic has undoubtedly inflicted enormous hardship. In the UK, 11 million people have been furloughed, losing 20% of their income or more in many cases. The number of people relying on Universal Credit has doubled, rising from three million in March 2020 to six million today. In January 2021, nearly a million businesses reported facing a serious risk of bankruptcy over the next three months, while thousands of artists, freelancers and have seen their livelihoods disappear. More than 70,000 households have been made homeless since the pandemic began.

Elsewhere however, things look rather different. Households that have managed to maintain their incomes throughout the pandemic – typically wealthier households and retirees – have built up around £180bn of cash savings. The UK’s billionaires have seen their wealth soar by 35% – equalling a staggering £40bn. Tech companies, estate agents, delivery companies, supermarkets and government subcontractors have posted bumper profits.

The way that the pandemic has disrupted the circulation of money in the economy has created distinct groups of winners and losers. Far from being a ‘great leveller’, the pandemic has acted as a ‘great polariser’.

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This week the chancellor, Rishi Sunak, had an opportunity to remedy these inequalities when he delivered the government’s Spring Budget. Many hoped the chancellor would take inspiration from across the pond, where President Biden recently launched an ambitious $1.9trn stimulus package to revitalise the economy and tackle pandemic-related injustices.

Far from being a ‘great leveller’, the pandemic has acted as a ‘great polariser’.

Listening to the chancellor speak from the despatch box on Wednesday 3 March, it sounded like there was cause for optimism. “We are using the full measure of our fiscal firepower to protect the jobs and livelihoods of the British people,” he declared.

But according to the Institute for Public Policy Research (IPPR), the Budget amounted to a stimulus of just £97bn or 4.4% of GDP – less than half the equivalent being deployed in the US. And with borrowing costs at record lows, many economists believe the chancellor could have done much more to stave off unemployment, which is forecast to rise to 2.2 million later this year. “Public investment could have been increased to boost the net-zero transition and help create 1.6 million jobs. But instead investment remains unchanged,” Carsten Jung, a senior economist at IPPR, explained.

The chancellor also pledged that “our approach to fixing the public finances will be fair, asking more of those people and businesses who can afford to contribute and protecting those who cannot.” Among the groups most in need of protection are those not in work. But the UK entered the pandemic with one of the least generous systems of unemployment support and statutory sick pay among advanced economies, and many who have relied on benefits for the first time have struggled to make ends meet. According to the Resolution Foundation, more than three in ten people who began claiming Universal Credit during the pandemic have been forced to go deeper into debt just to get by.

Although the chancellor extended the temporary £20 uplift to Universal Credit until October, many experts say much more is needed. The New Economics Foundation (NEF) estimates that under the government’s Budget plans nearly one in three people – a total of 21 million – will fall into hardship by May.

In addition, buried deep in the financial tables accompanying the Budget were departmental budget cuts of more than £15 billion from 2022-23 onwards, a cost that will almost certainly be borne by those most reliant on frontline services.

“The Budget was designed to sound big, but fell short where it mattered most. While there were plenty of headlines for business, there was little more than crumbs for families on the breadline,” Miatta Fahnbulleh, CEO at NEF, said in response.

Screenshot 2021-03-04 at 10.54.09.png

The Budget also increased taxes on working households, a decision that many economists view as controversial during a recession. Although headline income tax rates remain unchanged, the income tax personal allowance and the higher rate threshold have been frozen for four years – a move that some have called “taxation by stealth". According to the OBR, this will mean 1.3 million more people paying income tax and one million more paying the higher rate of tax, which will raise an extra £8bn a year in tax revenue by 2025-26.

Much of media attention in the lead up to the Budget was focused on possible tax increases on business. Changes that were rumoured to be in the pipeline included an increase in corporation tax and capital gains tax, and a possible ‘windfall tax’ on companies that had profited excessively from the pandemic. Ultimately however, the only one that materialised was an increase in corporation tax from 19% to 25%. Importantly, the tax increase – which will still leave the UK with the lowest tax rate in the G7 – does not take effect until 2023, and many fear that it may never actually come to pass.

Regardless, the future increase in corporation tax was more than offset by an immediate ‘super-deduction’ tax relief, which acts as a substantial subsidy for business investment. At a cost of £12bn a year, the relief will allow companies to cut their tax bill by up to 25p for every £1 they invest, and represents the largest cash giveaway in the Budget. Campaigners have pointed out that the subsidy will mainly benefit large multinational corporations, including those who have done well during the pandemic. “As we build back from the pandemic we need fairer tax measures to support high-quality public services and tackle inequality, not billions handed to big business in giveaways,” Robert Palmer, executive director at Tax Justice UK, explained.

Screenshot 2021-03-04 at 10.57.28.png

So while the chancellor said the Budget would “ask more" of those who can afford to contribute and "protect" those who cannot, in practice it delivered the reverse. The measures announced have asked ordinary households to contribute more in the form of tax rises and spending cuts, while not asking the pandemic’s biggest winners for an extra penny. And crucially, they have failed to adequately protect the most economically vulnerable.

Nowhere is this doublespeak more clear than in the Budget’s housing announcements. Throughout the pandemic, private renters have been among the groups most exposed to financial hardship. While homeowners and landlords have been offered mortgage holidays to assist with cash-flow issues, tenants have received precious little support – despite being far more likely to face financial difficulties. One in three private renters has lost income because of the pandemic, and 840,000 renters are now estimated to be behind on their rent payments. Without financial support, many face the impossible prospect of paying accrued arrears on top of what are already some of the highest rents in Europe.

One week before the Budget, a coalition of trade unions, tenant unions and housing organisations wrote to the government asking for financial support to help clear rent debt and protect tenants from eviction. “Without swift action, many renters will be unable to protect themselves and their families from coronavirus, homelessness and the misery of severe and perpetual indebtedness,” they wrote.

In the Budget the chancellor ignored this plea, and instead extended the stamp duty holiday and introduced a new ‘mortgage guarantee scheme’ to subsidise mortgages on home purchases valued up to £600,000. Despite government claims that the measures are intended to help “‘generation rent’ to become ‘generation buy’”, even the government’s own independent forecaster predicts that the main effect will be to push up house prices further – a scenario that will benefit existing owners and kick the ladder further out of reach for everyone else.

It’s not unusual for British chancellors to intentionally drive house prices upwards while paying lip service to tackling housing affordability. But to do so during a pandemic and an acute housing affordability crisis reveals where the government’s real priorities lie.

Overall the Budget seems designed to fuel a two-tier recovery, where the winners from the pandemic prosper at the expense of everyone else. Ultimately, the effect is to shift the cost of the pandemic onto those who can afford it least. In practice this is disproportionately the young, women and ethnic minorities.

“The COVID-19 pandemic has exposed and exacerbated inequalities within our economy and society. Women, particularly the poorest women, Black and minority ethnic women, disabled women, lone parents and young women have been badly hit,” Dr Mary-Ann Stephenson, director of the Women’s Budget Group, said in response.

“This Budget was a missed opportunity to address these inequalities.”

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