Crisis casts cloud over the Budget
THE Chancellor Rishi Sunak will deliver next Wednesday’s budget against the most uncertain economic backdrop since the financial crisis.
Sunak would like his time at the Treasury to be known for delivering lower, fairer and flatter taxes.
But the pall cast over financial markets and the global economy by Covid-19 virus will almost certainly mean that the longer-term reforms – of the kind delivered by successive Thatcherite Chancellors – may have to wait.
Some of the biggest tax decisions already are baked in the shape of the manifesto. Sunak will seek to create up to £20.5bn of extra headroom for spending over the next five years by freezing corporation tax at 19pc, reversing the commitment of one his predecessors, George Osborne, to lower it to 17pc.
This will help pay for the Tory commitment to take large numbers of lower paid workers out of the tax system by raising the threshold at which national insurance is paid.
There are also pledges for increased tax reliefs for research and development and more help on business rates as an interim measure as the whole system of commercial property taxation is reviewed.
There is some uncertainty as to whether Sunak will go it alone with a digital services tax on all online market transactions. If he presses ahead, it may cause a rift with Washington – which is protective of the digital giants – at a moment when the UK is seeking to negotiate a trade deal.
Sunak’s immediate predecessor, Sajid Javid, already has set the parameters for spending over the next Parliament. He raised the limits for public investment on projects such as roads and buses for the North and HS2, to 3pc of national output from 2pc. That represents a big increase.
He also moved out the deadline for balancing the current budget for another three years, giving Boris Johnson’s government the flexibility to spend more on the NHS, education and social care.
In spite of election and other pledges Boris Johnson’s government has been slow in unveiling plans for full reform of social care which is putting enormous strain on the finances of local authorities – the main providers.
The background to the post-election Budget (there is a fuller budget planned for November) has been enormously complicated by the coronavirus effect.
Sunak will have hoped to have gone into his first budget with a growing economy secured by the ‘ Boris Bounce’ which saw every part of the economy – services, construction and manufacturing – growing in the first two months of the year.
This would have created more spending headroom. But the clouds over the economy cast by the coronavirus will almost certainly lead the independent Office for Budget Responsibility to build extra caution into its forecasts, which in turn will mean lower tax receipts and less room for manoeuvre.
The pre-virus IMF forecasts showed the UK economy growing at 1.4pc this year and 1.5pc next year in spite of ongoing Brexit worries. With the Paris-based OECD suggesting that Covid-19 could halve the output of the developed world that would mean the British economy stagnating rather than expanding.
Sunak, together with the Bank of England, could counter the concerns by tearing up the fiscal rules again – they have been changed almost every year for the last 15 years – and by going bold as some analysts are advocating. A package of measures to ease the pain of smaller enterprises faced with supply and cash flow problems would help.
He could also bring forward future infrastructure spend but there will be serious questions about capacity.
If the Chancellor decides to borrow more, Sunak will be helped by the benign market for UK government bonds or gilts. Demand from UK institutions such as banks and insurers and foreign buyers has driven the yield on the ten-year bond down from 4.5pc at the time of the financial crisis to just 0.5pc now.
The bond funds have become much more tolerant of deficit spending in recent times giving the Chancellor extra room to manoeuvre should he seek to surprise everyone by putting his foot down on government spending.