After a tumultuous 12 months of economic downturn and unprecedented loss, speculation around the 2021 Budget is inevitable. With both the 2020 budget and mini-budget bringing a mixed bag of grants, cuts and controversial schemes, there’s understandably some apprehension about just how the UK economy will recover and, more importantly, what this recovery might mean for your personal finances. We look at what the Budget is, how it works, what the 2021 statement could include and, most importantly, what all of this could mean for you.
- The Budget is a yearly statement in which the Chancellor of the Exchequer sets out the UK’s economic standing and a plan for the immediate future.
- The 2021 Budget announcement is generating huge speculation due to the ongoing economic impact of the coronavirus pandemic.
- This speculation and apprehension around the 2021 Budget mean that there has never been a better time to save money.
What is the Budget?
The Budget is a yearly statement during which the Chancellor of the Exchequer delivers a report to the House of Commons (HoC) outlining the state of the economy and the government’s proposals for changes to taxation.
This time last year, you might have been hard-pushed to name the Chancellor of the Exchequer, but thanks to an unprecedented 12 months of television briefings and frequent announcements, most people are aware that this title is currently held by Rishi Sunak, a Member of Parliament who has become a household name amid the coronavirus pandemic.
How does the Budget work?
The budget process in the UK follows these four stages:
The Chancellor of the Exchequer, Rishi Sunak, delivers his budget to MPs in the House of Commons. This statement usually comprises two parts, the first being a review of the nation’s finances and economic situation, followed by the second part which sets out proposals for taxation.
The initial proposal from Rishi Sunak is followed by four days of debate with the opposition party, currently Keir Starmer’s Labour party.
The Finance Bill
Once the House of Commons debates the proposals and reaches a resolution, the budget is given permanent legal effect in the Finance Bill.
The Finance Bill then goes through Parliament in the same way as any other Bill. The only difference is that the House of Lords (HoL) plays a limited role, with the House of Commons maintaining the sole right to initiate and amend bills that levy taxes or authorise expenditure. The HoL will still have a second reading debate on the bill, but not clause by clause.
Scrutiny of the Budget by Committees
Finally, the Commons Treasury Select Committee, which is a cross-party of MPs whose role it is to scrutinise the work of the Treasury, examines the proposals, referring to experts and witnesses in order to conduct an inquiry and compile a report of conclusions and recommendations.
This report is then presented to the Government, which publishes a report in response. All of this information, including the debates, is made available on the UK Parliament website.
When is the 2021 budget?
The 2021 budget will take place on the 3rd March 2021, following the previous statement made on the 11th March 2020.
Why is the 2021 budget so important?
The 2021 budget brings with it a lot of anticipation and uncertainty because of the economic impact of the coronavirus pandemic. For example, on the 25th November 2020, the Office for Budget Responsibility (OBR), which is responsible for keeping tabs on Government spending, estimated that borrowing would be at £349bn for the current financial year (6th April 2020 to 5th April 2021).
This amount is the highest figure ever seen outside of wartime and comes as a devastating blow to the economy. It also stands in stark contrast to the 2018/19 Budget’s optimistic outlook, when unemployment was at its lowest since the 1970s and the deficit had fallen to its lowest level since 2001.
Due to the unprecedented impact of the coronavirus pandemic, the UK economy has shrunk by 11%, with £22bn being spent on the track and trace system alone.
What could be announced?
With limited options available, the likelihood of austerity seems high, but this is a severe measure. In an interview late last year the Chancellor stated that the UK would “not see a return to austerity”, but he did go on to say that the UK were about to witness “financial shock laid bare”.
What might make the announcement even more pivotal is that the cost of borrowing currently remains at an all-time low, making it possible that the UK might choose to increase its debt instead or potentially announce that the Bank of England base rate will change to a negative rate.
Put simply, the following three elements are likely to feature in the announcement:
- Cutting spending in departmental sectors to bridge the gap between borrowing and spending
- Raising taxes to put public finances back on a suitable footing
- Increasing borrowing on the international money market to provide immediate relief
The statement will likely contain information about different government grants, which will be of particular importance to those who are self-employed. There have also been rumours that the government will provide support to those who have been victims of the cladding scandal and who now face huge replacement costs.
Other things that could feature in the Budget include clarification on the closure of the furlough scheme and what has come to be known colloquially as a ‘rabbit out of the hat’ announcement, which is often something unexpected, such as the now-controversial ‘Eat Out to Help Out’ scheme from August 2020.
How might the Budget affect me?
Depending on what measures the Government chooses to take to rebuild the economy, it’s likely that we might find some bills and purchases becoming increasingly expensive, and this means that saving has never been more important. Of course, the Budget affects everyone differently, depending on their professional, personal and financial circumstances.
If, for example, the Government raises taxes, you might want to brush up on your knowledge of the different kinds of taxes and how any changes to taxation might affect your financial position. The kinds of taxes likely to be affected include National Insurance, wealth tax, capital gains tax, inheritance tax, stamp duty and council tax.
If you’re affected by the furlough scheme, it’s also likely that you’ll find out how and when this scheme may end.
Now is perhaps the best time to compare savings account rates and lock in an attractive fixed interest rate on your savings, so that no matter what economic journey lies ahead, you know that your money is safe and will continue to generate interest.
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