Revised growth predictions from the Office for Budget Responsibility (OBR) showed the UK economy is bouncing back from Covid much more quickly than it had predicted in the spring - giving Mr Sunak more spending power.
The economy is on course to grow by 6.5 per cent in 2021 – 2.4 per cent higher than predicted six months ago – while unemployment is much lower than feared; meaning the budget deficit is £51bn lower than had been expected in March.
The OBR said the Chancellor had been provided with “a Budget windfall that he has added to with tax rises that lift the tax burden to its highest since the early 1950s”.
In addition to the National Insurance rise to provide further funding for health and social care and raise around £18bn by 2026/27, the OBR said a further £18bn will be added to the budgets of Government departments through the undoing of previously announced but “unspecified” cuts that had been included in the November 2020 Spending Review and March 2021 Budget..
Mr Sunak announced almost £2bn of new Covid catch-up funding for schools and colleges, an extra £2.2bn for courts, prisons and probation services - in part to clear the backlog of criminal cases that has increased during the pandemic - and confirmed £5.7bn of funding for green transport schemes including £1.4bn in West and South Yorkshire. The latter scheme is £1.5bn more than the originally earmarked £4.2bn.
But there was no mention about the future of the proposed HS2 Eastern leg from Birmingham to Leeds or the Northern Powerhouse Rail project beyond
Mr Sunak saying the Government’s long-delayed Integrated Rail Plan will be published “soon”.
The OBR said: “The October 2021 Budget and Spending Review delivers a large and sustained increase in public spending amounting to £22.9 billion a year in 2026/27, comprising a £25 billion increase in departmental resource spending and a £3 billion boost to Universal Credit, which is only partly offset by £6.7 billion saved by the temporary move from a triple to double lock for the state pension.
“Of the roughly £30 billion on average added to departmental budgets in each year of the Spending Review, around half goes directly from the new levy to health and social care with the other half undoing the £18 billion of unspecified cuts to pre-pandemic spending totals made in the last two fiscal events.”
It said by 2026/27, the nation's tax burden will have risen to 36.2 per cent of GDP from its pre-pandemic rate of 33.5 per cent.
"Taking his March and October Budgets together, the Chancellor has raised taxes by more this year than in any single year since Norman Lamont and Ken Clarke’s two 1993 Budgets in the aftermath of Black Wednesday," the OBR said.
Mr Sunak told Parliament that the current state of public finances was down to the response to the Covid crisis.
“Taxes are rising to their highest level as a percentage of GDP since the 1950s.
“I don’t like it, but I cannot apologise for it – it’s the result of the unprecedented crisis we faced and the extraordinary action we took in response.”
The Chancellor added that “Government should have limits” and said his goal is to reduce taxes.
“By the end of this Parliament, I want taxes to be going down not up,” he said.
He has established a Charter for Budget Responsibility which aims to ensure public sector net debt falls as a percentage of GDP.
But Mr Sunak warned that inflation is likely to average around four per cent next year - which he blamed on the “global forces” of rising demand for goods as economies open up after Covid and rising energy prices.
He warned the problems would “take months to ease”.
But he said he was aiming to create “an economy fit for a new age of optimism”.
Shadow Chancellor Rachel Reeves said: “Families struggling with the cost of living crisis, businesses hit by a supply chain crisis, those who rely on our schools and our hospitals and our police - they won’t recognise the world that the Chancellor is describing. They will think that he is living in a parallel universe.”
Council taxes set to rise
Rishi Sunak handed local authorities a £4.8bn funding settlement for the next three years - but the public have been warned to expect their council taxes to rise.
Mr Sunak said: "As well as funding to deliver the Prime Minister’s historic reforms to social care, we’re providing local government with new grant funding over the next three years of £4.8bn - the largest increase in core funding for over a decade."
Councillor James Jamieson, Chairman of the Local Government Association, welcome the funding but warned: "The potential rise in local government core spending power over the next three years will also be dependent on councils increasing council tax by three per cent per annum."
He added: “We are pleased that today’s Spending Review has provided new government grant funding for councils over the next three years to support vital local services. This will help meet some – but not all - of the extra cost and demand pressures they face just to provide services at today’s levels.
“Capital investment in skills, transport, housebuilding, and the provision of school places for children with special educational needs and disabilities (SEND) announced today are positive. It is also good that the Government will provide additional funding to help councils continue their ongoing efforts to support people at risk of rough sleeping and homelessness and to fix potholes and improve our local roads.
“It is disappointing that the Chancellor has not provided additional funding to address existing pressures on adult social care services and not increased public health funding. We remain concerned that the money allocated to social care from the Health and Care Levy will be insufficient to fund reforms.
“Investing in local places is one of the most powerful tools of the Government’s levelling up agenda. With adequate long-term resources and freedoms, councils can deliver world-class local services for our communities, tackle the climate emergency, and ensure all parts of the country are able to prosper in the future.
“We continue to analyse the detail of today’s announcements. Councils will be looking for clarity and certainty over the future of local government funding reforms and that this three-year Spending Review is reflected in a three-year settlement for local government.”
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