The Chancellor has to finish tackling Covid, secure a recovery, then fix the public finances, in a blizzard of tough decisions.
Source - Daily Telegraph 28/02/21
The Chancellor will stand up to deliver the next Budget on Wednesday, March 3, with a mind-boggling array of problems before him.
After 10 years campaigning for financial discipline in the wake of the financial crisis, the Conservatives have suddenly found themselves presiding over the biggest borrowing binge since the Second World War.
So far Rishi Sunak’s rhetoric has remained cautious, indicating that the long battle against the deficit of the credit crunch has left its mark on the occupant of 11 Downing Street.
In his spending review in November – before the latest wave of Covid really took off – the Chancellor warned this year’s bumper borrowing was only possible “because we came into this crisis with strong public finances”.
“We have a responsibility, once the economy recovers, to return to a sustainable fiscal position,” he said.
Back in October, he called balancing the books a “sacred duty”.
Potential tax hikes have been mooted on fuel duty, corporation tax and even extra charges on the self-employed.
Mr Sunak has made clear the Budget will focus on “the next stage” of the response to Covid, which has worsened since November, though the vaccines offer hope of reopening in the foreseeable future.
So will he open the spending taps even further, or tighten the purse strings?
Covid support
The immediate priority is a decision over furlough and business support.
Both were introduced when companies were ordered to close last year.
We are still in lockdown now, so the Chancellor is under pressure to extend the schemes again.
“When it was suggested the furlough scheme might end in April, we were not anticipating the third national lockdown, so there might be a case for extending it,” says Julian Jessop at the Institute of Economic Affairs, proposing its more gradual withdrawal over time as the economy opens up.
He added that extending the extra £20 per week on Universal Credit would also be worthwhile.
Overall this should be part of a package to sustain spending, rather than cutting back, according to Hande Kucuk at the National Institute of Economic and Social Research (NIESR).
“In times of crisis when output is considerably below its potential and when interest rates are close to zero, fiscal multipliers can be much larger, meaning that any fiscal consolidation in the form of tax rises or spending cuts might harm output more than the rise in revenue or cut in spending,” she says.
“So unless the timing and the design is right, fiscal consolidation will definitely delay the recovery.”
Furlough has been running for 11 months now, at a cost to the public purse of £53.8bn.
However, it has helped squash the unemployment rate as the pandemic has rocked the economy. So far 11.2m Brits have had their wages paid via the furlough scheme and as of January, 4.7m jobs were still being supported by it. Almost one million - 938,500 - of these jobs belong to the wholesale and retail sector.
An extension in November means the scheme is not due to end until April, but economists have called for a longer tapering of the programme until the summer to coincide with the end of Covid restrictions.
Mr Sunak is plotting a new tax on online deliveries in March and a raid on the self-employed later this year, The Telegraph revealed on February 28.
The Chancellor will use the March 3 Budget to announce a £5 billion fund to help high street pubs, restaurants and non-essential shops that have remained closed as a result of the lockdown.
On March 23 – dubbed "tax day" in Whitehall – he will then unveil a series of consultations on further tax increases to start paying for the £300 billion cost of dealing with the virus crisis.
Capital gains tax hike
A dramatic hike in capital gains tax in the Budget. As previously reported by The Telegraph, the Chancellor could seek to bring CGT in line with income tax.
Doing so would lead to a massive increase in costs for people selling on business assets, second homes and non-ISA shares. CGT is currently charged at 10pc and 20pc for most taxable assets, or 18pc and 28pc for residential property that is not a main home.
But the reported rise could see basic rate taxpayers pay 20pc CGT, higher rate taxpayers pay 40pc, and additional rate taxpayers pay 45pc, in line with income tax.
The annual tax-free allowance of capital gains - currently at £12,300 - could be slashed back to between £2,000 and £3,000 in a further blow to the wealthy.
The Office for Tax Simplifcation (OTS) outlined a possible CGT hike late last year that would raise over £18bn by aligning it with income tax rates.
The likelihood of the move has prompted landlords to sell up to avoid being stung.
Businesses are bracing for a sharp increase in corporation tax, with Mr Sunak expected to raise rates to shore up government funds in the wake of huge levels of borrowing.
Corporation tax could rocket from 19pc - one of the lowest levels among OECD countries - to 25pc, according to reports ahead of the Budget.
That would be more in line with other G7 countries, with President Joe Biden expected to raise it from 21pc to 28pc in the US.
However, Treasury Select Committee chairman Mel Stride says a level of 23pc could prove more palatable.
“If we end up at 23pc or a bit under and still the most competitive in the G7, given it raises about £3bn per percentage point increase, when you are having to take tough decisions about where to go, it is inevitable I think the Government will go into that place,” he told a Resolution Foundation event.
However, The Telegraph revealed on February 28 that entrepreneurs could be spared an expected hike in corporation tax in the Budget with a lower rate introduced for small businesses. Mr Sunak is weighing up bringing back the small profits rate, axed by George Osborne in 2015, to support small to medium-sized companies. This lower rate taxed smaller companies with turnover of up to £300,000 at 20 per cent of profits.
Stamp duty extension
Mr Sunak originally granted the stamp duty holiday in July to run until the end of March. Raising the threshold beyond which buyers pay tax from £125,000 to £500,000 helped provide a boost to the property market.
But experts have warned the March cut-off could cause a cliff-edge for house prices by catching out buyers in the middle of transactions. The Times has reported that Mr Sunak is set to extend the holiday for another three months as a result, to the end of June.
Despite the Government’s ambition to go electric on UK roads by banning new petrol and diesel cars from 2030, Mr Sunak may wait to end the 10-year freeze on fuel duty.
With people avoiding public transport to curb the spread of coronavirus, they have relied on cars more during the pandemic.
While the Treasury reportedly considered a rise of up to 5p a litre from March, reports now suggest the Chancellor will take no action in the approaching Budget.
“More people are still using cars as safer mode of transport,” a Treasury source told The Guardian. “And there is a massive cost to electric vehicles at the moment – that feels like the priority to address.”
VAT and business rates relief extension
With venues unable to even partly reopen until 12 April at the earliest, MPs and hospitality bosses have urged the Government to extend VAT and business rates relief for the sector.
Whitehall waived business rates for companies in the retail, hospitality and leisure sectors at a cost of around £10bn for the 2020-21 financial year. It also slashed VAT from 20pc to 5pc for pubs and restaurants in July, running to the end of March.
However, ministers are facing calls to extend these support measures to the end of 2021, with Boris Johnson’s gradual reopening roadmap meaning businesses will be operating under social distancing restrictions until at least late June.
Mr Sunak also announced £4.6bn of one-off grants in January to stave off winter collapses during the third lockdown.
The grants - worth up to £9,000 - were targeted at the retail, hospitality and leisure sectors, though it is not clear if more funds will be made available as restrictions continue.
Eat Out to Help Out 2
The sequel is rarely better than the original, but the hospitality industry will be hoping another outing for Mr Sunak’s restaurant voucher scheme again lures millions of diners back to their tables this summer.
The original scheme ran during August and offered up to £10 off per person at participating restaurants. While it is credited with people ordering 100m meals, it still cost the taxpayer £849m. But now the Daily Mail reports Mr Sunak may bring the scheme back for a second outing to boost flagging restaurants this summer.
Treasury economists are reportedly also weighing up whether to hand out high street vouchers to try and revive bricks and mortar retailers.
Cheaper pints
Number 11 will also look at reducing alcohol duty for pubs in a bid to help them avoid being undercut by supermarkets, which have thrived during the pandemic while pubs have suffered repeated lengthy closures.
Conservative MP for Clacton Giles Watling asked at PMQs the week before the Budget: “Now we're out of the EU, surely we can do as we please with beer duty? Differentiation in favour of on-sales could deliver great benefits to pubs.”
Prime Minister Boris Johnson responded: “There is just such a review being carried out after consulting pub owners and brewers and others, and I know that the Chancellor is looking very closely at the findings.”
Return to order
Angela Eagle, a Labour MP, wants extra support in the short term to help control the virus, in the form of higher sick pay so those with Covid can afford to stay at home.
After that, she wants steps to get the finances back in order.
“I worry about what he called his sacred duty to balance the books. He keeps saying it but has borrowed nearly £300bn in a year. I want to see what the fiscal rules are,” she says.
“He needs to set out a coherent and believable way out of the current support systems. It needs to move from being universal, as lockdown lifts, to sectoral, because clearly some areas of the economy are going to be much more badly affected.”
This takes the Chancellor into medium-term goals: stimulating growth after lockdown ends, while restoring the public finances.
Paul Johnson at the Institute for Fiscal Studies suggests phasing out furlough and business support in line with restrictions, so industries such as nightclubs and air travel are helped for longer.
At the same time he sees hiring and training incentives as key for generating new jobs, while a green investment package could help get spending going.
Beyond that, the Chancellor needs to think long term, with consultations on the way the state works.
Covid has wrought dramatic changes on the economy, some of which will be permanent, and some of which exposed underlying failures in the way the Government raises and spends money.
Major reforms
Kevin Hollinrake, a Conservative MP, wants the Chancellor to look at sweeping reforms, including a new model of social care potentially with auto enrolment into an insurance scheme; replacing business rates with higher VAT to put physical and online retail on a level playing field; and establishing regional mutual non-profit banks to fund businesses.
“Typically budgets in the past have tinkered at the edges without any strategic framework, but the reality is that we have some huge spending challenges, even before the Covid crisis, so we have to do things which actually move the dial,” he says.
When it comes to raising more money, Kucuk says it is time to consider which tax hikes may be needed in future.
“This is a good time to start a comprehensive tax review. The pandemic will have long-term effects on households and businesses, so there should be a review that investigates the best way to raise additional taxation on the basis of lasting economic damage,” she says.
Depending on the state of the recovery, Jessop raises a tantalising prospect: no tax hikes at all.
“If the economy rebounds as strongly as I expect and the public finances continue to beat the forecasts of the OBR, then I think we have got a good chance of getting through this crisis without the need to raise taxes,” he says.
And that offers a rare chance for the Chancellor to put off any hard decisions while he waits for the recovery to kick in.
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