Budget 2021: How much will it cost the UK and how will we pay?on March 3, 2021 at 3:20 pm

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The pandemic is costing the government hundreds of billions of pounds. Where will it all come from?

Daffodils in front of the Treasury

image copyrightReuters

Plans for how the government will start paying for Covid have been outlined by Chancellor Rishi Sunak.

Hundreds of billions have been spent supporting businesses and jobs, and fighting the pandemic.

The Office for Budget Responsibility (OBR) – which keeps tabs on government spending – said that borrowing would be £355bn for the current financial year (April 2020 to April 2021), before falling back to £234bn over the next year.

That’s the highest figure ever seen outside wartime.

Over £100bn is being spent on support for jobs, such as the furlough scheme, where the government steps in to pay most of workers’ wages.

The NHS and other public services have been given extra money to pay for the costs of fighting the pandemic.

However, the pandemic has reduced the amount the government raises in tax.

Unemployed or furloughed workers pay less income tax, businesses pay less tax if their profits are lower, and shoppers pay less VAT if they buy fewer things.

NHS employee hands test kit to person in car

image copyrightGetty Images

With more money going out and less coming in, the government has only one option – to borrow.

Even if the pandemic ends quickly, there will still be higher costs and lower tax receipts in future years too.

All of this means more borrowing.

The Conservatives came to power in 2019, with a promise not to raise the rates of the three biggest taxes – income tax, national insurance and VAT. Together, these bring in more than half of government revenue.

Mr Sunak did not raise these taxes in the Budget. But he is increasing the amount gathered by freezing what’s known as the income tax threshold.

This is the amount you can earn each year before paying any income tax – £12,500 at the moment.

Normally it goes up a little each year, to reflect the fact that many people’s wages rise a little too.

This threshold will rise next year, but stay at that level until 2026. (As will the threshold at which you start to pay the higher rate of 40%).

This means that if people do get a wage rise, they will be paying more income tax.

Mr Sunak also announced that the tax on company profits – corporation tax – would rise from its current rate of 19% to 25% in 2023. However, only companies making profits of more than £250,000 per year wold pay the full amount.

In his Budget speech, the chancellor indicated he was reluctant to cut public spending

Some areas have long been protected, such as the NHS – and it would be difficult to reduce health spending after a big pandemic.

State pensions, another big spending item, are protected by a so-called “triple lock”, which guarantees they rise with wages, prices, or 2.5% every year – whichever is highest. The manifesto promised to keep this, too.

In November the chancellor announced some measures to reduce public spending, such as a controversial decision to freeze pay for many public sector workers.

He also cut the amount the UK will spend on overseas aid, despite a manifesto pledge to keep it at 0.7% of national income.

One thing which works in the government’s advantage is that the cost of borrowing is currently at a 300-year low.

Because the government has been able to borrow easily at very low interest rates, its debt is more affordable.

Chart showing the cost of servicing the UK - currently lower than at any point since before 1700

At the moment it pays just 0.76% interest to borrow for 10 years.

Though it’s still low, it has been rising recently – and the higher it goes, the harder it will be to support the UK’s debt burden.

And in any case, interest payments will weigh on future generations until the debt is paid off, meaning there is less money available to spend on public services, or tax cuts.

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