Sunak Plans Highest U.K. Taxes Since 1960s to Pay Pandemic Bill
(Bloomberg) -- British finance minister Rishi Sunak will keep spending big to help the economy through the pandemic crisis and intends to raise the U.K. tax burden to its highest level for more than 50 years to begin to pay the bill.
With the country still in the grip of its third national lockdown, the chancellor of the exchequer made clear in his annual budget that saving jobs in the months ahead is his top priority.
He added 65 billion pounds ($90.8 billion) of aid to help companies and citizens cope over the rest of this year and next, taking the government’s total fiscal support to 407 billion pounds.
In a somber speech to members of Parliament, Sunak then sketched out his aim to start restoring the U.K.’s battered balance sheet, with increased taxes for businesses and more than 2 million people in the years to follow.
Britain has already endured its deepest recession in more than 300 years, alongside the worst pandemic death toll in Europe. Official forecasts Wednesday confirmed the economy will suffer long-term damage, lasting years.
“It’s going to take this country – and the whole world – a long time to recover from this extraordinary economic situation,” the chancellor said. “Once we are on the way to recovery, we will need to begin fixing the public finances – and I want to be honest today about our plans to do that.”
At the center of his plan is a politically risky freeze of income tax thresholds, pulling more people into paying higher bills as earnings rise in the future, and a hike in corporation tax for larger, profitable firms to 25% in 2023, from 19% now.
The measures will raise the total tax burden from 34% to 35% of GDP in 2025-26, the highest level since the late 1960s. Freezing income tax thresholds for four years brings 1.3 million people into the tax system and creates 1 million higher-rate taxpayers by 2025-26, according to government forecasts.
Sunak insisted it was “fair” and “responsible” to ask bigger businesses making a profit and people earning higher wages to pay more.
Key budget developments include:
- Income tax thresholds will be frozen for the basic 20% rate and higher 40% rates after next year, potentially dragging more people into paying more tax as their earnings increase in future years. Sunak said he wasn’t “hiding” this policy, and argued it will be “progressive and fair”
- The 5% reduced rate of VAT will be extended for six months to Sept. 30
- The stamp duty holiday, which pauses taxing home sales, will be extended until June 30
- The furlough wage support program will be extended through September. As businesses reopen, from July, they will be asked for a contribution of 10%, rising to 20% in August and September
- The 20 pound a-week uplift to Universal Credit welfare payments will be extended for six months
- Planned rises in alcohol and fuel duty will be canceled
- The Bank of England is being ordered to drive the U.K.’s goals toward eliminating greenhouse gas pollution
- The U.K. economy, which shrank almost 10% last year, is forecast to expand by 4% this year, according to the Office for Budget Responsibility
- The economy will grow 7.3% next year, stronger than forecast, but after five years it will remain 3% smaller than it would have been without the pandemic
- Gilts fell across the curve on Wednesday after the Debt Management Office announced that it will sell 295.9 billion pounds ($413 billion) of bonds in 2021-22.
What Bloomberg Economics Says...
“When Chancellor of the Exchequer Rishi Sunak looks back at his March 2021 budget, he’ll probably be able to say he got the balance right. He extended significant near-term support to help drive the recovery from the pandemic while deferring most tax increases until the economy has healed.”
-- Dan Hanson, senior economist. Click here for full INSIGHT.
Prime Minister Boris Johnson plans to lift lockdown restrictions gradually over the next four months, with some businesses not able to reopen until June 21 at the earliest. Sunak extended the main crisis support measures for three months beyond that date, in case the coronavirus outbreak gets worse.
The extended aid for workers and businesses will help prevent a surge in unemployment. But it will also add to the 300 billion pounds the U.K. has spent fighting the pandemic amid the sharpest contraction since the Great Frost of 1709.
Sunak is aiming to strike a balance between providing short term emergency help for a country still battling to emerge from lockdown, while seeking to reassure markets that he will get a grip on the deficit before too long.
Politically, Sunak is in danger of criticism from his Conservative colleagues who do not want taxes on business to rise and may worry that increased bills for citizens ahead of the 2024 election will cost the party votes.
The economic risk is that planned tax increases and the withdrawal of state support could deter investment and potentially stifle the longer-term recovery.
With that in mind, Sunak also announced measures to encourage investment and incentives for businesses to hire more apprentices. A new “super deduction” policy will be introduced, which will mean that for the next two years when companies invest, they can reduce their taxable income by 130% of the cost of that investment.
“We’ve never tried this before in our country,” Sunak said. Forecasters say the plan will boost business investment by 10%, he added.
The main opposition Labour Party said the chancellor was desperate to slash government aid for those who need it.
“Behind the spin, the videos and the photo ops, we all know the chancellor doesn’t believe in an active and enterprising government,” Labour Leader Keir Starmer said. “We know he’s itching to get back to his free market principles and to pull away support as quickly as he can.”
While the national debt has risen past a record 2 trillion pounds, historically low interest rates means the cost of servicing it is low. That gives the chancellor breathing space, although he’ll also have an eye on the next general election due in 2024.
©2021 Bloomberg L.P.