Hiking Taxes, Cutting Benefits: Sunak Faces 5 Key Fiscal Choices
U.K. Chancellor of the Exchequer Rishi Sunak is facing five crucial fiscal decisions -- including whether to deliver the biggest overnight welfare-benefit cut in history and the largest state pension increase in 30 years, according to the Resolution Foundation think tank.
The choices loom as Sunak seeks to repair the huge fiscal damage wrought by the coronavirus pandemic. Unprecedented spending to keep workers in jobs and businesses afloat sent the budget deficit to a peacetime high of over 14% of economic output in the last fiscal year.
His task is being made easier by a stronger-than-expected recovery from the crisis, which could deliver a fiscal windfall of 25 billion pounds ($35 billion), the Resolution Foundation estimates.
That may help meet some of the growing demands on the public purse -- from extra money for the National Health Service and social care to funds for catch-up teaching. However, it may not be enough to spare Sunak potentially unpopular decisions and trade-offs that could define the Conservatives time in office.
The first of them are likely to come in the autumn, when Sunak is due to announce a review of departmental spending and possibly a full-blown budget involving tax changes.
1. Triple Lock
The U.K. increases pensions each year by the highest of annual growth in average earnings, inflation, or 2.5%. Wage growth has been disrupted by the pandemic and is running at over 8%, potentially handing pensioners the biggest cash increase in the state pension since 1991.
Bloomberg reported Friday the triple lock could be scrapped as soon as this week. Resolution suggests instead applying it over two years or using an alternative underlying wage measure that would deliver an increase of around 3% to 5%, saving the Treasury between 3 and 4 billion pounds.
2. Universal Credit
A 20-pound weekly increase in the Universal Credit benefit, announced as temporary relief during the pandemic, is due to expire at the end of the month -- delivering a 5 billion-pound blow to 4.4 million households. That would be the biggest overnight cut in history, according to Resolution, only comparable to a 10% reduction in unemployment support during the Great Depression.
The cut would also see most recipients lose more than 5% of their disposable income, with 1 million households losing over 10%, a risk to growth that means Sunak should change course, Resolution said. Instead, it recommends retaining the uplift but freezing the benefit for four years, halving the cost to 3 billion pounds a year.
3. Social Care
The government has long promised an overhaul of social-care funding, and media report suggest that Sunak will raise national insurance payments made by some 25 million taxpayers to pay for it. While a 1 percentage-point increase would raise 13 billion pounds, it would hurt young workers and wage earners the most, the think tank said.
It recommends extending the tax hike to working pensioners, increasing the threshold for paying the levy to 10,000 pounds and raising dividend and capital gains tax to help fund the policy. The combined impact of those changes would generate an extra 1.1 billion pounds, it estimates.
With a spending review looming, Sunak must also decide which government departments need to tighten their belts further, and whether to press ahead with a planned 16 billion pounds of cuts. Sticking with those would mean no progress being made in reversing post-financial crisis austerity measures for prisons and local governments, Resolution said.
5. Net Zero
The Treasury must demonstrate its commitment to achieving net-zero emissions by the middle of the century, while showing the cost will not fall too heavily on low-income households, the foundation said. Road taxation should also be overhauled this decade, it said.
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