AUTUMN BUDGET AND SPENDING REVIEW 2021
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AUTUMN BUDGET AND
SPENDING REVIEW 2021
PRE-EVENT BRIEFING
1AUTUMN BUDGET AND
SPENDING REVIEW 2021
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OVERVIEW AND ANALYSIS
On Wednesday 27 October, the Chancellor of the Exchequer Rishi Sunak will deliver the
Autumn Budget alongside the Spending Review, in arguably the most significant fiscal
event for this Government thus far. The Budget will outline the state of the economy and
the Government’s plans for taxation and spending, with the Spending Review setting out
funding for Government departments and public services for the next three financial years.
This will be the first multi-year Spending Review since 2015, with the 2019 and 2020
editions only allocating spending for one year each due to the economic uncertainty
created by Brexit and the COVID-19 pandemic respectively. This edition of the Spending
Review will set out departmental funding for the next three years, from 2022/23 to
2024/25, taking funding allocations beyond the end of the current Parliament and the
next general election, which is currently expected in the spring of 2024. The Chancellor
has asked each Government department to find savings of 5% in advance of the Spending
Review, suggesting that at least some departments will be facing real-term cuts in their
budgets. The Institute for Fiscal Studies has predicted net cuts to ‘unprotected’ services
and departments of over £2 billion for 2022-23.
‘Protected’ services and departments that already have long-term funding settlements in
place include schools, which had a funding settlement until 2022/23 announced in August
2019, the Ministry of Defence, which had a funding settlement until 2024/25 announced
in November 2020, and NHS England, for which an updated funding settlement from
2022/23 to 2024/25 (supported by the Health and Social Care Levy) was announced in
September 2021.
Government sources have indicated that economic forecasts are likely to be significantly
more positive than those presented at the Spring Budget in March, which predicted
unemployment to peak at 6.5% and annual growth this year of 4%. The stronger-than-
expected recovery is likely to give the Chancellor more room for manoeuvre on public
spending than forecast, though sources have indicated that he is likely to ‘tighten belts’
for now, to be able to increase spending or cut taxes closer to the next election. Prime
Minister Boris Johnson is thought to agree on this and has notably not ruled out further
tax rises in the near future if deemed necessary, following on from the Health and Social
Care Levy announced in September and the changes to corporation and income tax
announced in March’s Spring Budget.
The Chancellor is thought to be considering additional spending on welfare to partially
offset the removal of the £20-per-week Universal Credit uplift, while additional funding is
also expected in order to provide immediate relief for social care, either through a short-
term cash injection or adjustment to council tax rules to allow more revenue to be raised.
The Chancellor is also expected to outline the next stage of the Government’s ‘Plan for
Jobs’ following the end of the furlough scheme, and give further detail on economic
support for its ‘levelling-up’ agenda as he sets out a fiscal roadmap for the remainder of
this Parliament.
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TAX CHANGES
While major changes have already been announced to income and corporation tax and
National Insurance this year, we can likely expect further announcements on taxation from
the Chancellor on Wednesday.
Though it was only announced a matter of weeks ago, there have already been calls for
the Health and Social Care Levy to be increased from its current level of 1.25% on National
Insurance and dividend tax rates. The Institute for Fiscal Studies has stated that the Levy
will need to be increased to 3.15% by as soon as 2025 to properly meet the current costs
of health and social care, with health forecast to require 44% of all public service spending
by 2025. Changes to the Levy in the near future are thought to be unlikely though.
To provide immediate relief for the social care sector, the Chancellor is thought to be
considering changing the current rules governing council tax increases, to allow local
authorities to raise the social care element of council tax from the current 3% to 5% without
the need for a local referendum. Given the criticism the Government has previously come
under for raising taxes, an alternative measure thought to be under consideration as a
short-term solution is a direct funding boost for social care.
An eye-catching change under consideration is an online sales tax, which was mooted
ahead of the March Budget but later dropped. The Chancellor is thought to be considering
a 2% tax on online sales, which would generate annual revenue of around £2 billion for
the Treasury.
To fund the Government’s net zero pledges and incentivise a switch to clean energy, the
Chancellor will likely outline plans to cut levies on electricity bills while increasing levies on
gas bills.
Another likely change to taxation will involve alcohol duties, which have been frozen since
2017. Possible changes include standardising tax rates across alcohol types or raising
alcohol duty each year in line with inflation. Other options include different rates depending
on where drinks are sold, for example, lower rates for pubs than supermarkets.
The Chancellor is also thought to be considering cutting the earnings threshold at which
student loans must be repaid to around £23,000, down from £27,000, which would be
expected to raise roughly £2 billion per year.
There have also been suggestions that capital gains tax rates could be increased to be
aligned with income tax, rising to 40% from 28% for higher-rate taxpayers, though this is
thought to be unlikely. Changes to tax relief on pension savings and inheritance tax have
been highlighted as an area unlikely to change, however, there has still been some
speculation that that inheritance tax could be imposed on pensions. An increase of up to
20% is predicted in the number of families facing liability for this tax given the increase as
a result of the pandemic, in the number of unexpected deaths of individuals who had not
organised their estates.
It is also predicted that the Chancellor will target the number of inheritance tax exemptions
available such as the ability to gift surplus income and the £3,000 annual
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exemption. Restricting these exemptions could raise an additional £1 billion for
the Treasury. Moreover, raising this tax could be viewed as ‘enhancing’ the levelling-up
policy by sharing the tax burden across different social classes, with those with the most
valuable estates paying more. Whilst inheritance tax might increase onproperty, additional
reliefs may become available for ‘Business Property’.
The reduction of the Universal Credit uplift has reportedly put 100,000 renters at risk of
default, and there are concerns as to how households will pay for electricity and gas. As
well as the effect on the housing sector, it has been reported that the demand for
foodbanks has soared since the decision was announced. In terms of gas and electricity,
Sunak is reportedly considering a cut to the 5% rate of value-added tax on household
energy bills.
For housing, the Government has confirmed that further details on a new residential
property developer tax will be announced at the Autumn Budget, including announcement
of the rate. The revenue raised from the tax will be used to fund remediation of unsafe
cladding and reports indicate the tax aims to raise at least £2 billion over a decade.
TRANSPORT, INFRASTRUCTURE AND LEVELLING UP
The Ministry for Housing, Communities and Local Government was renamed in September
2021 to the Department for Levelling Up, Housing and Communities to reflect the
Government’s committed approach to the “levelling up” agenda. With ongoing uncertainty
over what “levelling up” truly is and therefore how it can be measured, all eyes will be on
transport and infrastructure to see how this is shaped.
Michael Gove, the new Secretary of State for Levelling Up, Housing and Communities used
his speech at the 2021 Conservative Party Conference to outline the objectives for
levelling up. Ranging from strengthening local leadership, to raising living standards, they
give Mr Gove an intentional breadth of oversight on most areas of Government policy which
we may see reflected in the Spending Review. Most notably, the Levelling Up White Paper
is expected to be published later in the autumn, fleshing out what to date have been the
broad strokes of levelling-up.
Despite the Government’s commitment to levelling up, reports have indicated that savings
need to be found within transport, following a year of government subsidy of the sector.
Sources have indicated that this could come from job cuts, with a particular focus on
closure of ticket offices, facilitated by the switch from paper tickets to e-tickets. Before
addressing cuts though, the impact of the pandemic is still being felt by some, with
passenger numbers only at 41.6% of what they were pre-pandemic, according to the Office
for Rail and Road. In particular, Transport for London is calling for an additional £1.7 billion
from the Government to keep services running until 2023. This follows as the Government
has already provided £4 billion in support since March 2020, with the latest injection
providing financial support until 11 December. With this in mind, it is likely we will see the
balance being teetered between cuts and further support.
Plans surrounding the Great British Railway (GBR), announced in May 2021, are likely to
be given further detail, as the Government recently announced a competition to find a new
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headquarters for GBR and has announced plans to host an action day with bidders for rail
passenger service contracts. So far, York and Doncaster have publicised their bids for the
HQ as the Government aims to invest in the Midlands and North of England. Numerous
think tanks have also called for additional spending on rural transport to improve access
to jobs in rural areas.
With questions over the future of the HS2 phase 2b (covering Crewe to Manchester and
the West Midlands to Leeds) still unanswered, and further details yet to be released on the
Northern Powerhouse Rail project to upgrade rail infrastructure across the North of
England (estimated to cost up to £30 billion), it is reported that the Integrated Rail Plan
will be published alongside the Spending Review. The plan will provide further detail on
how projects such as these will be progressed.
Turning to infrastructure, in September the Government published the National
Infrastructure and Construction pipeline which committed to increased spending, with
£650 billion of public and private investment over the next 10 years. This included £200
billion to be invested up to 2024/25. It has been reported that further details on where
investment will be prioritised will be announced in the Spending Review.
Underpinning all infrastructure announcements is likely to be the theme of climate change
and decarbonisation, with all eyes on the Chancellor to outline significant commitments
ahead of COP26. Reports have circulated that electric car grants will be cut in the Review,
with electric charging infrastructure likely to receive additional funding instead. Mooted
changes include reforms to plug-in hybrid incentives and grants to help drive transport
decarbonisation. The possibility of some form of tax on air travel, to reduce the number of
in-UK flights is also under consideration by the Treasury.
NET ZERO AND COP26
The Net Zero Strategy published recently committed over £5 billion to decarbonising the
economy, focusing on the transport and housing sectors in particular with significant
investment in electric vehicles and green heating for homes. Notably missing from the Net
Zero Strategy was significant action on cutting emissions through insulating homes or
levies on carbon-heavy foods, though measures such as these are unlikely to be
announced on Wednesday. Another omission was a Net Zero Test to ensure to ensure that
all Government policy is compatible with UK climate targets, a flagship demand of the
Committee on Climate Change.
However, the Chancellor is likely to announce further details of the new levies on gas bills
that will replace those on electricity, as announced in the Heat and Buildings Strategy. This
will likely come alongside the aforementioned cuts to electric car grants.
The Government is under pressure to go further than the actions announced already, with
the COP26 summit now just days away and Labour calling for an annual climate
investment of £28 billion to 2030. And that is not the only fiscal headache facing the
Government on net zero, with the Treasury’s own Net Zero Review raising concern that
£37 billion per year – 1.7% of GDP - could be lost in fuel duty and vehicle excise duty alone
as fossil fuels are phased out over the coming years. The Chancellor will be under pressure
to set out plans to recoup this lost revenue, especially as the Treasury has also noted that
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an economy-wide carbon pricing mechanism would only raise revenue equivalent to 0.5%
of GDP.
The Review suggested that reforms to existing taxes or new ones would be needed to
secure a net zero future that is fiscally sustainable, rejecting borrowing as a long-term
solution. With that in mind, it is possible that the Chancellor will set out plans for green
levies to raise the funding necessary to pay for the comprehensive decarbonisation of the
economy.
JOBS AND SKILLS
In his keynote speech at Conservative Party Conference, the Prime Minister outlined that
the Government’s priority was to move “towards a high wage, high skill, high productivity
economy”. As part of the “high wage” commitment, the Government is expected to
announce an increase to the National Living Wage, the minimum wage for workers over
the age of 23. It has been reported that this could see a 5.7% increase from £8.91 to
£9.42, in line with the recommendation of the independent Low Pay Commission.
The Chancellor is thought to be likely to announce an end to the one-year freeze on public-
sector pay which was introduced at Spending Review 2020. The pay freeze has impacted
over 2.6 million workers since April 2021 and was introduced in an attempt to keep wages
in line with the private sector. Since private sector earnings have recovered, with the
average private-sector earnings in Q2 being 10.1% higher than the year previously, it is
thought the freeze will come to an end. The Chancellor will not make specific pay awards
at the Spending Review though since these come from the Pay Review Bodies consultation.
In terms of jobs, the Chancellor has already announced a £500 million extension to his
‘Plan for Jobs’ to support those leaving the furlough scheme. Those unemployed over the
age of 50 will receive targeted support to help with the return to work. The Government
also announced an extension to the Job Entry Targeted Support Scheme to September
2022, which supports those who have been unemployed for over 3 months. The emphasis
on jobs has been extended to young people too, with the announcement of an extension
to the £3,000 apprenticeships incentive for employers until 31 January 2022.
Numerous groups have called for more learning and upskilling opportunities for adults to
tie in with the Government’s pledge to move toward a “high skill” economy, with calls for
the apprenticeship levy to be turned into a lifelong learning levy and adult education
funding to be ringfenced. The Government recently ran a consultation on the National
Skills Fund, introduced as part of the ‘Plan for Jobs’, but the response is yet to be
published. Further announcements on learning and upskilling are therefore thought to be
unlikely.
EDUCATION AND CHILDCARE
Despite the return of pupils to school, concerns over attendance and time lost learning
remains an ongoing consequence of the pandemic. Emphasis on catch-up remains a key
issue, with the Department for Education recently publishing a report finding that those
from the most deprived backgrounds have experienced the most adverse impact of the
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pandemic and will require further support. Support for the National Tutoring Programme
will continue but is set to taper off in the coming years, with £393 million for tutoring in
2022-23 followed by £359 million in 2023-24, and £110 million in 2024-25. There have
been indications that school catch-up funding could be under threat, with sources
indicating that the Government’s £3.1 billion commitment to catch-up funding could
materialise to just £1-£2 billion in the Spending Review. The £3.1 billion commitment
prompted the Government’s school’s catch-up tsar, Sir Kevan Collins to quit earlier this
year, following his call for £15 billion.
The Government has also recently announced additional funding to support teachers in
the form of £129 million of tax-free bursaries for trainee teachers starting in 2022/23, as
well as a salary boost of up to £3,000 tax-free for teachers of maths, physics, chemistry
and computing.
A long-term funding settlement for schools was previously set out in August 2019, covering
the fiscal years up to 2022/23. The Government committed to investing £14 billion,
meaning spending on schools will increase by 3% between 2021/22 and 2022/23.
Numerous charities and think tanks have called for funding to support children’s mental
health, as the number of referrals continues to rise to almost double pre-pandemic levels.
The Local Government Association has called on the Government to invest in ‘no referral’
early support mental health hubs and make school-based counselling available to all
children to tackle rising mental health issues. So far, the Government has updated their
guidance to schools on mental health and wellbeing to adopt a ‘whole school’ approach
and launched a training programme for mental health leads in schools. In May, the
Government announced that schools and colleges would be able to apply for a grant of
£1,200 to train senior leaders on mental health and wellbeing. It is thought to be unlikely
that further funding will be committed on Wednesday.
Finally, in an attempt to claw back savings, reports have indicated that there could be
reforms to the student finance system. The Government reportedly plans to reduce the
earnings threshold at which students must begin to repay their student loans from
£27,295 to somewhere between £23,000 and £20,000. The Institute for Fiscal Studies
has said reducing the graduate earnings threshold to £23,000 would save the Treasury
£2 billion a year.
HOUSING AND PLANNING
Within the sector of Planning and Development there is speculation about potential
announcements, given the backdrop of a continued emphasis on Levelling Up, the
‘rethinking’ of the controversial planning reforms and the recent cabinet reshuffle.
An increase in Capital Gains Tax (CGT) was first predicted in the March 2021 budget and
remains a possibility. According to the Office of Tax Simplification, the rate of CGT could
increase from 28% to 45%. This would be likely to have the effect of sharply reducing the
volume of transactions of buy-to-let properties which in turn may cause rents to increase
and further contribute to an imbalance between demand and supply.
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The Building Safety Fund has been outlined as a priority for the Chancellor to set out
additional funding on top of the £5 billion already committed. The Secretary of State for
Levelling Up, Housing and Communities Michael Gove is also under pressure to find a
solution to the widening crisis. With the G15 housing associations group calling for VAT on
remediation works to be removed, additional support for building safety is thought to be
likely.
Within the housing sector, it is recognised that further affordable housing must be provided
to respond to the increasing calls for evidence of progress on the levelling up agenda. The
Chancellor is thought to be considering announcing the next 10 years of its Affordable
Homes Programme now, rather than waiting until 2025/26. Councils have recently called
on the Government to use this month’s spending review to give local authorities more
power to build 100,000 social rent homes a year, reforms which could be signposted on
Wednesday.
As COP26 approaches, the G15 are also calling for the Government to consider making a
firm commitment that the full £3.9 billion will be allocated from the Social Housing
Decarbonisation Fund. It has recently been announced that the Government has allocated
£800 million to this fund, as part of their investment into decarbonisation of heating
buildings. Various other schemes to reduce carbon in housing have been announced such
as the Heat Pump Ready Innovation Programme, Home Upgrades Scheme, Boiler Upgrade
Scheme and Heat Network Transformation Programme. The G15 has requested that this
funding gets brought forward rather than be spread out over the next decade, whilst also
enabling housing associations to bid directly for these funds jointly with local authorities.
CRIME AND POLICING
The pandemic has resulted in significant disruptions in the court system, with the backlog
of cases reaching record levels of over 60,000 in the Crown Court. The new Secretary of
State for Justice, Dominic Raab is thought to be pushing for funding to clear this backlog
and provide additional support for victim support services, with his predecessor Robert
Buckland targeting an increase of one-third in the Ministry of Justice’s budget over the next
three years to offset previous cuts.
The Government made several financial commitments over the summer under the
‘Beating Crime Plan’. This included a £17 million package focused on those admitted to
A&E with a knife injury or following contact with police, and an investment of over £45
million in specialist teams in schools and alternative provision in violence hotspot areas,
supporting young people at risk of involvement in violence back into education. They also
announced a £31 million expansion of Project Adder, which aims to tackle drugs.
Combined with the commitments made at Conservative Party Conference to crack down
on crime, it raises the possibility of additional measures being announced on Wednesday.
If the Government aims to increase spending on police, criminal courts, and prisons at the
same rate as the total of all other unallocated spendings, then it would be expected that
spending would decrease between 2021/22 and 2022/23. Any larger increase in
spending on police, prisons, and criminal courts would have to be balanced with cuts to
other areas of unallocated public spending.
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As such, there could be a shortfall in funding for both prisons and courts in the short term.
However, in announcing the Spending Review, the Chancellor stated that they would be
setting out how to improve lives “by investing in the NHS, education, the criminal justice
system and housing”, and so the Government may choose to announce a deliberate
further investment in the crime and policing.
HEALTH AND SOCIAL CARE
Despite the recent funding announcements regarding the NHS and social care, there are
some key areas which may require additional funding at the Spending Review.
Last month, the Government announced the Build Back Better plan for health and social
care to provide the NHS with a significant funding increase over the next three years, and
include and fund early steps on adult social care reform. This announcement included
£30.3 billion of funding across health and social care in England, with £5.4 billion being
earmarked for social care reform. This is to be funded by the controversial Health and
Social Care Levy, which will see a 1.25% increase on National Insurance Contributions.
The three-year funding settlement announced in September will see day-to-day spending
for NHS England and the Department of Health and Social Care rise by 3.9% a year on
average in real terms until 2024/25, compared to 2018/19 spending. At this stage, it is
still unclear how much funding from the levy will be allocated for key specific areas of
health and care expenditure, including budgets for the NHS workforce. Capital budgets to
invest NHS estates and equipment have also not been set beyond 2021/22.
As part of a prolonged spending squeeze, between 2015/16 and 2019/20, funding for
long-term capital investment in the NHS was reallocated to prioritise day-to-day running
costs. Since then, capital budgets have begun to increase, with a new Health Infrastructure
Plan, and the ‘40 new hospitals’ building programme. However, there has not yet been a
comprehensive multi-year capital investment budget for health services in England, this is
an area which may be clarified in the Spending Review as part of NHS recovery.
Funding for local authority public health budgets has also fallen in recent years. While the
Public Health Grant has been maintained in real terms in 2020/21 and 2021/22, the
grant is still 24% lower per head in real terms compared to 2015/16, which could be
reassessed in light of the pandemic, however, restoring the core public health grant to
2015/16 levels would require an additional investment of £1 billion.
The pandemic has outlined the significant strain placed on the NHS due to workforce
shortages, and the Government has set manifesto commitments to increase numbers of
nurses, GPs and other primary care professionals. The Spending Review is likely to be an
opportunity to clarify and allocate resources needed for long term workforce planning,
given that staff shortages have been a key talking point regarding the clearing NHS
backlog.
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PENSIONS AND WELFARE
Following the suspension of the triple lock pension guarantee, retirees are reportedly set
to find out shortly the level of their 2022 pension entitlements. The state pension is set to
increase by either 2.5% or in line with inflation, following the removal of the earnings plank
of the triple lock.
On Universal Credit, the Department for Work and Pensions was thought to be in
negotiations with the Treasury to allow people who receive the benefit to keep more of
their earnings. It would involve reducing the taper rate for Universal Credit from 63p to
60p, seeing the weekly payment increase by an average of £9.39, at an annual cost to the
Government of around £1 billion annually. This is at a marginal cost when compared to
the £6 billion the government are saving by cutting Universal Credit £20 uplift and is
therefore likely to be viewed as an attractive alternative.
The reduction of the Universal Credit uplift has reportedly put 100,000 renters at risk of
default, and there are concerns as to how households will pay for electricity and gas. As
well as the effect on the housing sector. The silver lining here is that in terms of gas and
electricity, Sunak is reportedly considering a cut to the 5% rate of value added tax on
household energy bills.
The G15 has outlined the issue of higher poverty and child poverty rates, alongside the
highest proportion of Universal Credit recipients. As a result of these findings, it has been
suggested through the levelling up agenda, that money is allocated to local authorities.
The Northern Housing Consortium, agree with these views, evidenced in their statement
that “The Spending Review should set out clear commitment to a real-terms increase in
local government funding.” Council tax is subsequently set to increase, with the additional
revenues earmarked for funding local authorities who will seek to concentrate these funds
into areas of the community perceived to be most in need.
POST-BREXIT AND TRADE
At the launch of the Spending Review, the Chancellor said that it was an opportunity to set
out how the Government will deliver British people’s priorities and support jobs and
businesses by, “Advancing Global Britain and seizing the opportunities of EU Exit”.
In furthering its ‘Global Britain’ agenda, the Government will be keen to continue pursuing
post Brexit trade deals internationally. Since the last budget in March, they have signed
new trade deals with Serbia, Australia, and Norway, Iceland & Liechtenstein. It is expected
that a significant new trade deal could be signed with New Zealand in the coming weeks,
though discussions on a free trade deal with the US seem to have considerably slowed.
UK Export Finance under the Department for International Trade will perhaps also see
some extra revenue to support the Government’s ongoing exporting and international
trade ambitions.
On 19 October, the Prime Minister also announced £9.7 billion of new foreign investment
at the Global Investment Summit. This comes as the Department for International Trade
has launched the new ‘Investment Atlas’, an online platform designed to help international
investors identify and execute high priority investment opportunities.
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