The biggest tax-raising budget since 1993 – but further rises could well follow

Rishi Sunak has set out the biggest tax increase at any budget since Norman Lamont unveiled the contents of his red box less than a year after the 1992 general election. Sunak announced nearly £30bn worth of tax rises for the 2024/25 fiscal year. Alongside cuts to planned spending made last November, this means the government is forecast to borrow only for investment by the middle of the decade.

One of the chancellor’s principles for "sustainable public finances" was that “in normal times, the state should not be borrowing to pay for everyday public spending”. On these current forecasts, that principle is met, which would mean no need for further tax rises or spending cuts this parliament.

However, the latest forecasts are built on some shaky foundations. If the chancellor is to deliver (on his own definition) sustainable public finances, then the biggest tax-raising budget in over a quarter of century may well need to be followed by more tax rises.

The spending plans in the budget will be hard to deliver at the spending review

Taken together, last November’s spending review and Wednesday's budget reduce planned public spending in 2024/25 by a total of £17bn. That means the government is now intending to spend less in the middle of this decade than it had planned before the pandemic.

However, these levels will prove hard to maintain when the government comes to allocate that spending to departments at the multi-year spending review later this year. Once the settlements already promised to the NHS, schools, defence and overseas aid are taken into account, the government’s plans imply a real-terms cut of 1% to all other ‘unprotected’ departments. This would come on top of 10 years of big cuts in services like prisons, courts and social care – with many of those services showing signs of deteriorating performance in recent years. Further cuts would not seem to be consistent with the Conservative manifesto pledge of "world class public services".

Furthermore, the plans do not include any allowance for additional pandemic-related spending in future years. There is no additional money for annual vaccine programs or cash to help public services unwind the large Covid-related backlogs accumulated in the last year. And even more funding may be required if the public want, for example, a more resilient NHS to deal with future crises or a more generous social safety net to protect people when they lose work.

Given these pressures and demands, the government’s plan to spend less than it was intending pre-crisis is not credible.

Rishi Sunak will face pressure not to implement all of his planned tax rises

The chancellor will also face a battle to deliver his planned tax rises in full. The plan to freeze the personal allowance and higher-rate threshold in income tax is expected to raise £8bn if maintained until 2025/26, but Sunak will likely face pressure from opposition politicians and his own party to increase those thresholds each year. The freeze in the higher-rate threshold will mean one million more people paying higher-rate tax by 2025, a phenomenon at odds with Boris Johnson’s 2019 Conservative leadership campaign pledge to increase the higher-rate threshold to £80,000.

Corporation tax increases are likely to be easier to deliver, although with the increase not taking effect until April 2023 there is plenty of time for Sunak to be persuaded to change course. But he might find it more difficult to unwind fully the temporary "super-deduction" for investment. Previous experience of ‘temporary’ increases to the Annual Investment Allowance suggest that more generous allowances for investment often end up lasting longer than planned as businesses lobby for extensions so as not to discourage investment.

While the budget’s tax rises look difficult to deliver, one tax cut in particular (not yet factored into the forecasts) seems very likely to happen in future years. Fuel duty was frozen (cut in real terms) for the 11^th successive year at the budget – at a cost to the public purse of £900m per year. This appears at odds with the prime minister's stated commitment to a 'green recovery'. This cost will keep ramping up if the duty continues to be frozen, and would require other offsetting tax increases to maintain the chancellor’s budget balance.

The chancellor will hope that a strong economic recovery comes to his rescue

Compared with the plans laid out in this budget, it seems more likely that the chancellor will find himself spending more and raising taxes by less. That would mean, on current forecasts, more fiscal consolidation – probably in the form of tax rises – would be needed at a later date if he is to meet his own definition of sustainable public finances.

Of course, the chancellor could still avoid the need for further tax increases if the economy grows faster than the forecasts predict. However, forecasts can be too optimistic just as easily as they can be too pessimistic, so the chancellor should not be banking on a booming recovery. If that rapid bounce back does not emerge, the 2021 budget will not be the last time the chancellor is levelling with the public about the need to raise taxes.