The economic blow dealt by the pandemic forced chancellor Rishi Sunak to deliver a spend now, tax later Budget. Outlining the government’s plans to drag the economy out of the Covid-19 crisis, he announced measures designed to deliver a short-term boost to businesses and jobs and significant tax rises to help rebalance the public finances. Ultimately, Mr Sunak’s eagerly anticipated statement painted a bleak picture of the state of the UK’s finances, with the responsibility for filling up a black hole falling at the feet of taxpayers.

As the nation prepares to take its first tentative steps out of another lockdown, against a backdrop of Europe’s most advanced vaccine rollout, let’s review the main talking points from the Budget – and analyse how they might impact the pound.

Business rates holiday extension

The business rates holiday, which was due to finish in England at the end of March, has been extended until 30 June, followed by a six-month period where rates will be discounted to one-third of the normal charge. This will provide prolonged relief for high street businesses forced to shutter their doors during the pandemic. The chancellor called it “a £6bn tax cut for businesses”.

Furlough scheme extension

The furlough scheme – which pays 80% of employees’ wages for the hours they cannot work during the pandemic – was scheduled to end in April. Mr Sunak confirmed that it would be extended until June in its current form, followed by a gradual phasing out until the end of September as employers cover a larger share of wages of laid-off employees. The extension is significant for a large section of the population, with 11.2 million jobs supported by the scheme since March 2020.

Support for the self-employed

While the furlough scheme supports employed people, the equivalent for the self-employed – the Coronavirus Self-Employed Income Support Scheme (SEISS) – which comes in the form of grants, will also continue. From April, those eligible can claim a fourth grant worth 80% of three months’ average trading profits, up to £7,500 in total, which will be followed by a fifth grant later in the year, covering May to September.

Stamp duty holiday extension

The stamp duty holiday – introduced to help buyers who might have taken a financial hit because of the pandemic – raised the property tax threshold from £125,000 to £500,000. This has been extended to 30 June when it will begin moving back to its original level by the end of September using an interim threshold of £250,000, which Mr Sunak said would “smooth the transition back to normal”.

Taxation

The government has honoured its “triple tax lock” election manifesto promise, meaning there will be no changes to rates of income tax, national insurance or VAT – but it will freeze the personal allowances for income tax at their current levels until the end of the 2025-2026 tax year. So, how else will the chancellor fund his plan to spend £65 billion over the next two years supporting jobs, investment and the economic recovery?

In terms of personal tax, Mr Sunak is also freezing the tax-free thresholds on inheritance tax liabilities and pensions allowances until 2025-2026. Corporation tax on the other hand will experience a significant increase in 2023 from 19% to 25%, raising £17bn a year and ensuring corporate profits are taxed more heavily in the UK than most other advanced economies. This represents a sharper increase than many business leaders expected, as the government attempts to plug the gap created by its spiralling pandemic debts.

Mr Sunak is the first chancellor to raise corporation tax rates since 1974. However, to tempt companies to invest in the UK before the tax rises are triggered, he had a surprise up his sleeve: a £25bn “super-deduction” tax break for companies to stimulate investment in what he called the “biggest business tax cut in modern history”.

What does this mean for the pound?

Many of the key measures had been announced in advance of the Budget, meaning they were already priced into the market – and those that were not leaked are very pro-growth/pro-investment. Therefore, the pound experienced a muted reaction to the chancellor’s financial statement, holding relatively steady against the US dollar and euro – despite being generally well-received in the international markets. But with the fiscal taps left fully open over the coming months, providing strong support for the economy, the pound could profit from what has been labelled a ‘giveaway’ Budget – taking the total additional spending and benefits made available during the Covid crisis to £352 billion.

Looking further ahead, investors in the pound may have reservations over the government’s fiscal aid now, tax increases later approach to offset the spending splurge. For example, the proposed increase in corporation tax to 25% in April 2023 will lift the overall UK tax burden to its highest level in 50 years. However, the government’s revenue-raising process will not kick-in for over 12 months, leaving the pound unburdened by tax in the near-term and able to ride the wave of economic growth that is forecast this year.