FU­TURE OF THE ECON­OMY

Chan­cel­lor rode to the res­cue in spring, but now it looks like a dif­fi­cult choice be­tween spend­ing cuts or tax rises, writes Rus­sell Lynch

The Daily Telegraph - Business - - Front Page -

In an ad­min­is­tra­tion be­set by chaos, about-turns and re­bel­lions over Covid-19, A-lev­els and – in­evitably – Brexit, Chan­cel­lor Rishi Su­nak has had a good war. “Un­prece­dented” is a word much overused in the re­sponse of gov­ern­ments around the world to the pan­demic, but lit­tle else comes close to de­scrib­ing the fire­power de­ployed by Su­nak since March.

A £210bn ar­se­nal of spend­ing and sup­port for a third of the work­force’s wages at peak will this year push the UK’s deficit to lev­els not seen out­side of wartime. His life­lines for hun­dreds of thou­sands of busi­nesses, smooth pre­sen­ta­tion and eye-catch­ing mea­sures such as Eat Out to Help Out have pro­pelled him into the rare club of politi­cians known by their first name.

“Rishi” may cut through with the pub­lic, but from here the go­ing gets far tougher. A likely mid-Novem­ber Bud­get is the next chal­lenge, to be de­liv­ered just weeks af­ter the fur­lough scheme comes to an end and with the UK fac­ing its bleak­est win­ter since 2008. A re­turn to the job­less­ness seen af­ter the shal­low but bru­tal re­ces­sion of the early Nineties is a dis­tinct pos­si­bil­ity as lo­cal lock­downs spread.

Rock and a hard place

The Chan­cel­lor is torn be­tween the calls for con­tin­ued sup­port from sec­tors such as hos­pi­tal­ity that have been hob­bled by so­cial dis­tanc­ing, and the ad­vice of Trea­sury of­fi­cials urg­ing cau­tion.

In a memo leaked to The Daily Tele­graph in May, of­fi­cials wrote that “an­nounc­ing suf­fi­cient con­sol­i­da­tion mea­sures in the near-term may en­able head­room to be built for the later years of the Par­lia­ment”.

More re­cently, spec­u­la­tion over tax hikes has flared up, with rises in cor­po­ra­tion tax, cap­i­tal gains tax and the dras­tic scal­ing back of pen­sion tax re­lief for higher earn­ers.

While an ex­cep­tional deficit of more than £320bn is ex­pected in the cur­rent fi­nan­cial year, hawks worry over the medium-term fis­cal dam­age. The Of­fice for Bud­get Re­spon­si­bil­ity pre­dicts bor­row­ing re­main­ing above £100bn by the mid­dle of the decade.

Un­der the fis­cal watch­dog’s cen­tral sce­nario, the econ­omy has in­curred a struc­tural hit of 2.4pc of GDP: that’s al­most £60bn of dam­age that might have to be made up with spend­ing cuts, tax rises, or a com­bi­na­tion of both.

Big de­ci­sions will wait

So what will Su­nak do in Novem­ber? Fol­low the Hip­po­cratic prin­ci­ple of “pri­mum non no­cere” and de­fer the big de­ci­sions for another day, ac­cord­ing to one of his re­cent pre­de­ces­sors, Philip Ham­mond. Ham­mond says the Chan­cel­lor’s pri­or­ity will be sup­port­ing the econ­omy; “he will prob­a­bly de­fer the big ques­tions” sim­ply be­cause it is im­pos­si­ble to an­swer them. “I think it will be quite dif­fi­cult for him to make the big de­ci­sions in Novem­ber and I think he has re­alised that, which is why he is sig­nalling he will hold a mini-Bud­get,” he says.

“By the spring we are go­ing to know two things – whether or not there is a Covid vac­cine on the

‘I think it will be quite dif­fi­cult for him to make the big de­ci­sions in Novem­ber – and why he is sig­nalling a miniBud­get’

‘The truth is there are not out there the tax rises that are pub­licly ac­cept­able that will raise sig­nif­i­cant sums of money’

‘The mantra doesn’t change, it is all about pro­duc­tiv­ity. Any­thing that will im­prove it has to be a good thing right now’

hori­zon, and whether we can start mov­ing back to nor­mal­ity next sum­mer with a view to hav­ing a vac­ci­nated pop­u­la­tion for win­ter 2021-22, and we are go­ing to know whether we have left [the EU] with some kind of a deal or no kind of a deal – and by spring the kind of prob­lems that no deal brings will be­come ap­par­ent.

“Rishi has po­ten­tially got a dou­ble shock to ad­dress next year. My guess is that he will do some cos­metic things in Novem­ber and leave the big things un­til the spring.” Those “cos­met­ics” could in­clude in­fra­struc­ture in­vest­ment, the for­mer chan­cel­lor sug­gests, in the spirit of the March Bud­get hi­jacked by Covid-19. “The mantra doesn’t change, it is all about pro­duc­tiv­ity.

Any­thing that will im­prove the UK’s pro­duc­tiv­ity and com­pet­i­tive­ness has to be a good thing right now.”

How­ever, Ham­mond op­poses some kind of fur­lough ex­ten­sion – likely to be the Chan­cel­lor’s big­gest call – on the grounds that it will de­lay the re­shap­ing of the econ­omy and the reskilling of work­ers.

Tax­ing ques­tion

Two other re­cent oc­cu­pants of 11 Down­ing Street have mean­while warned against hasty tax rises, with both Ge­orge Os­borne and Sa­jid Javid urg­ing him to “en­cour­age the risk-tak­ers”, at a Cen­tre for Pol­icy Stud­ies con­fer­ence this month.

Spend­ing de­part­ments could be tar­geted for “bil­lions in sav­ings”, Javid said.

Os­borne pointed out that “the truth is there are not out there the tax rises that are pub­licly ac­cept­able that will raise sig­nif­i­cant sums of money” – at least with­out break­ing man­i­festo com­mit­ments not to raise VAT, in­come tax and na­tional in­sur­ance, which ac­count for more than two thirds of the na­tional tax take.

Stu­art Adams, a tax ex­pert at the In­sti­tute for Fis­cal Stud­ies, ar­gues that with the econ­omy so weak, “in the short run he shouldn’t be look­ing to raise taxes at all for at least another cou­ple of years”.

Busi­ness groups such as the Bri­tish Cham­bers of Com­merce go fur­ther still and ar­gue for the Chan­cel­lor to of­fer tax in­cen­tives to en­cour­age hir­ing, such as tem­po­rary na­tional in­sur­ance hol­i­days for new re­cruits, es­pe­cially with govern­ment bor­row­ing costs close to all-time lows and the prospect of mass un­em­ploy­ment

loom­ing.

Man with a plan

Over the longer term, ex­perts say Su­nak needs to set out a clearer di­rec­tion for the Govern­ment on tax, po­ten­tially through a broad-based re­view of the en­tire sys­tem.

Gemma Tet­low, chief economist at the In­sti­tute for Govern­ment, points out that the Chan­cel­lor is not in a po­si­tion where he faces im­me­di­ate fi­nanc­ing prob­lems, but ar­gues that a longer-term tax plan and a pub­lic dis­cus­sion would be a use­ful step.

She says: “There has not been much of a strat­egy. Where there has been a strat­egy, it has been on cut­ting rather than rais­ing tax. There was not much strat­egy af­ter 2010 on rev­enue rais­ers, it has been much more op­por­tunis­tic.”

Ac­coun­tants and tax ex­perts say that iron­ing out in­ef­fi­cien­cies in the cur­rent sys­tem could broaden the tax base, al­though some sug­ges­tions rep­re­sent po­lit­i­cal dy­na­mite too ex­plo­sive for most chan­cel­lors to touch. Take rais­ing tax on food, cur­rently zero-rated for VAT pur­poses.

John Cul­li­nane, tax pol­icy di­rec­tor at the Char­tered In­sti­tute of Tax­a­tion, says: “It’s kind of con­sid­ered a sa­cred thing that you can’t tax food. You could com­pen­sate the peo­ple who re­ally need it through the ben­e­fit sys­tem and have change to spare.”

Ac­cord­ing to the OECD, prop­erty taxes and con­sump­tion taxes are the least harm­ful to growth, with cor­po­ra­tion tax the most dam­ag­ing; this levy is mooted to rise from 19pc to 24pc in the most re­cent spec­u­la­tion.

For a Chan­cel­lor look­ing for any kind of rev­enue he can get in Novem­ber, more palat­able op­tions could in­clude in­creas­ing the drive to­wards tax au­toma­tion and thus clos­ing the UK’s £31bn tax “gap”, EY’s head of tax pol­icy Chris Sanger ar­gues.

A longer-term tax re­view could al­low Su­nak to act af­ter his fur­lough-style bailout for the UK’s 5m self-em­ployed work­ers, giv­ing him the po­lit­i­cal cover to act on na­tional in­sur­ance af­ter Ham­mond him­self was forced into a re­treat in 2016.

Sanger says: “There’s prob­a­bly a limited amount of time in which you can make those types of changes and get pub­lic ac­cep­tance, be­fore the self-em­ployed in­come sup­port scheme is a long-dis­tant mem­ory.”

For now, pluck­ing tax feath­ers from the goose is likely to be less of a pri­or­ity for the Chan­cel­lor than nurs­ing it back to health. As Jagjit Chadha, di­rec­tor of the Na­tional In­sti­tute for Eco­nomics and So­cial Re­search, points out, “the most im­por­tant thing in tax is the tax base – it’s the amount of ac­tiv­ity in the econ­omy”.

Over-hasty ac­tion could be fa­tal for both the re­cov­ery and a po­ten­tial move next door for West­min­ster’s new golden boy.

SOURCE: HMRC

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