Tax increases, vacation extensions, Hawkish tone: forecasts for the British budget


Chancellor of the Exchequer Rishi Sunak leaves 11 Downing Street to announce the Treasury’s annual spending review on November 25, 2020 at the House of Commons in London, England.

David Cliff / NurPhoto via Getty Images

LONDON – UK Treasury Secretary Rishi Sunak will announce on Wednesday the extension of the country’s vacation program until the end of September. The government is expected to use its full “fiscal firepower” to support the economy.

The budget will be provided as the nationwide Covid-19 restrictions will be gradually lifted in the coming months and will be fully removed on June 21. More than 20 million people in the UK have now received a first dose of vaccine.

In his budget speech on Wednesday, Sunak is expected to outline the government’s “three-point plan” to steer the UK’s economic recovery in light of current fiscal measures and plans to restore the country’s shattered public finances in the future. He will also plan the next phase of the government’s employment plan launched in October.

The coronavirus job retention program will continue to subsidize 80% of the wages of workers on leave through September. However, companies are being asked to contribute 10% in July and 20% in August when the economy reopens.

“At the end of the tunnel there is now light with a roadmap for the reopening. So it is only right that we continue to help companies and individuals in the challenging months ahead – and beyond”, Sunak is expected.

The government embarked on unprecedented public spending as the 2020 economy saw its sharpest decline in more than 300 years. At Sunak’s last budget announcement in November, he unveiled the country’s largest peace budget ever recorded.

In addition to expanding the vacation program, Sunak is expected to provide additional social protection measures, corporate grants, loans and mortgage vacation, as well as grants for the self-employed and updates to back-to-work programs. He will also extend the weekly £ 20 surcharge on Universal Credit, the UK’s social security payment, until September.

“We are using the full extent of our fiscal firepower to protect the jobs and livelihoods of the British people,” Sunak is expected to tell the House of Commons.

Morgan Stanley analysts expect a package of measures worth GBP 20 billion, including the extension of the vacation and a targeted support program for pandemic-sensitive sectors.

Future tax increases?

The UK has taken on £ 285 billion (US $ 397 billion) in direct household bills since the pandemic broke out, representing 13.7% of GDP, according to the Budgetary Responsibility Office (OBR), which faces a lasting blow to the Public has warned finances.

As a result, some analysts cautiously expect the Chancellor to try to raise some money in the budget for Wednesday.

Morgan Stanley’s head of European economics Jacob Nell and British economist Bruna Skarica said Sunak could announce tax increases, potentially raising corporate tax to 21% from the fall, as well as introducing an online sales tax and other measures against green taxes to announce.

“The UK’s fiscal stance is still more hawkish than that of the US and the euro area. Chancellor Sunak stressed the need to put public finances back on a sustainable footing after the pandemic,” said Nell and Skarica in a statement on Friday .

“While we expect him to sound hawkish next week and deliver some tax hikes – maybe £ 5 billion – as a down payment for his intent, we see he won’t announce a tax hike until the fall – maybe 2% of GDP on tax hikes coming from April In force in 2022. “

Overall, Morgan Stanley predicts the additional tax revenue this fiscal year will increase from £ 5 billion to £ 10 billion next year.

“We assume that a further tightening of public finances – of 2% of GDP – will be announced in the autumn once the UK has made a significant recovery from COVID-19,” said a statement on Friday.

UBS economist Dean Turner suggested, however, that after a better-than-feared fourth quarter for the UK economy, the government’s fiscal position may not be as fragile as last reported by the OBR. As a result, UBS doesn’t anticipate any immediate tax hikes, but does suggest that future corporate tax changes could be signaled along with other modest changes like pensions and freezing income tax thresholds.

May not pull out the carpet

The UK’s better-than-expected fourth quarter means the government’s guidance may improve, according to Ruth Gregory, Senior UK Economist at Capital Economics. However, she cautioned that unwinding fiscal support early could hurt the recovery.

The OBR currently expects the economy to be 3% smaller by 2026 than it was before the pandemic, with a budget deficit of around £ 100 billion (3.9% of GDP) in 2025/26.

Gregory ruled that if the budget deficit is to return to pre-pandemic levels by 2026, Sunak may have to tighten fiscal policies by around £ 45 billion a year.

“Add the government’s desire to raise taxes sooner rather than later, so that tax hikes don’t happen immediately before the 2024 general elections. Then it is entirely possible that the Chancellor will take the first steps to reclaim some of the revenue in this budget. ” ” She said.

However, she suggested that the immediate priority will be preventing long-term economic scars, and for the time being Sunak will be content with signaling its intention to tighten on future budget announcements.

Capital Economics expects Sunak to announce fiscal easing from current plans of around £ 25 billion (1.2% of GDP) in 2021/22.

“But the risk is that over the next two years it will be tempted to pull the rug out from under the feet of households and businesses by reducing the budget deficit faster than currently planned,” said Gregory.

“Not only would it undermine economic recovery, it could create more public finance problems than it solves.”