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TThe nights are getting longer and longer and soon it will be time for the chancellor’s decision. Rishi Sunak’s emergency measures, most notably the licensing scheme, have protected the UK from much of the pain caused by an economic downturn insurmountable in modern history, but the aid has come at a cost.
In the first four months of this financial year alone, the government has borrowed more than £ 150bn and that figure is expected to more than double by March 2021. Sunak has four options in the budget set for the end of this year : boost growth by cutting taxes and increasing spending; leave well alone; take steps to reduce the deficit immediately; or announcing in advance measures to increase taxes or cut spending for later. You could also combine some of these options, providing short-term stimulus but outlining the taxes that will take effect in 2022.
According to some reports, the chancellor is working on a package of mind-boggling tax increases in the fall budget, most of them targeting the wealthiest. The Treasury dismisses talking about higher corporate taxes, capital gains taxes (CGT), less generous tax breaks and higher fuel taxes as speculation and says it is too early to say what will be in the budget. He sees the hand of right-wing conservatives working to create such a storm that the chancellor will be forced to scrap tax increases.
As a fiscal conservative, Sunak is certainly uneasy about how much the state is borrowing, but is also aware that the recent spike in activity could fade as the licensing plan is canceled and the mortgage payment holidays end. You’ll want to see how the economy performs over the next several months before deciding whether to start raising taxes is feasible.
Some things are off limits. Boris Johnson gave an assurance in last year’s Conservative manifesto that there would be no increases in income tax, national insurance and VAT rates for the whole of this Parliament. It would be a difficult compromise to break, even though all three represent much greater sources of income than, for example, increasing the CGT. A penny in income tax would raise £ 4.7 billion next year, a penny in employee NICs £ 4.5 billion, and an increase in the standard VAT rate from 20% to 21% £ 6.85 billion. Extending VAT on food, currently zero-rated, would generate a profit of around £ 18bn a year, but it is not a political initiative.
Almost all the options available to the chancellor have been tried by his predecessors in the past. Governments after World War II faced a national debt that was even higher in percentage terms than it is today, but which gradually reduced debt through a combination of economic growth and inflation. Sir Geoffrey Howe raised taxes in the 1981 budget despite rapidly rising unemployment, and more recently George Osborne imposed austerity measures while the UK was in the early stages of recovery from the 2008 financial crisis. John Major’s administration pre-announced tax increases designed to take effect after the economy had time to recover from the recession of the early 1990s.
While past chancellors have faced some tough budget decisions, none in living memory have done so during a health emergency. The economy has performed better than Sunak feared at the beginning of the crisis, but the number of Covid-19 cases, which is already increasing as lockdown restrictions are eased, is expected to rise as the crisis hits. colder weather. Sunak’s budget could easily coincide with more local closures and a more risk-averse mood among consumers worried both about contracting the virus and losing their jobs. The chancellor will not want to see the work he has done to prop up the economy go to waste, suggesting a budget where the immediate needs of the economy trump future prudence.
