Treasury Chancellor Rishi Sunak leaves 10 Downing Street after attending a Cabinet meeting on February 14, 2020.
Barcroft Media
While British Finance Minister Rishi Sunak is preparing to set the country’s economic path to recovery, analysts are considering the possibility of tax increases and a nod to future fiscal tightening.
The budget, due on March 3, comes at a time when Covid-19’s national restrictions are to be gradually resolved in the coming months, culminating in total removal on June 21. Meanwhile, more than 20 million people in the UK have already received the first vaccine dose.
Sunak told the BBC over the weekend that his budget “will provide support” but warned that the “shock to the economy” would not be a quick fix.
The government embarked on unprecedented public spending on the economy, registering its sharpest contraction in more than 300 years in 2020. In Sunak’s last fiscal announcement in November, he revealed the country’s largest peacetime budget ever recorded.
Sunak is expected to maintain some of the government’s support beams for the economy until the restrictions are eased, mainly by extending the license scheme until at least June in an attempt to avert an unemployment crisis, according to Dean Turner, economist at UBS Gestão of global heritage.
“Following the Chancellor’s announcement of a £ 5 billion ($ 7 billion) business grant scheme, we can also see more generous loan terms announced, as well as an extension of tax breaks to help companies in what we hope to be the last phase of blockages and, crucially, the subsequent recovery, “Turner said in a statement on Monday.
Morgan Stanley analysts are forecasting a £ 20 billion package of measures, including a license extension, a support program targeted at pandemic sensitive sectors and a one-time payment to benefit applicants affected by the termination of the £ 20 weekly increase to Universal Credit, the payment of British social security.
Tax increases?
The UK has assumed a direct tax cost of £ 285 billion ($ 397 billion) since the start of the pandemic, or 13.7% of GDP, according to the Office for Budget Responsibility (OBR), which warned of a lasting blow to the public finances.
As a result, some analysts are cautiously hoping that the chancellor will seek to raise some money from Wednesday’s budget.
Morgan Stanley’s head of European Economy, Jacob Nell, and British economist Bruna Skarica, said Sunak could announce tax increases, announcing a potential corporate tax increase to 21% starting in the fall, along with the introduction of a tax on online sales and new actions on green taxes.
“The UK’s fiscal stance remains more hawkish than its US and euro area counterparts, with Chancellor Sunak emphasizing the need to put public finances back on a sustainable basis after the pandemic,” Nell and Skarica said in Friday note.
“While we expect him to appear aggressive next week and deliver some tax increases – perhaps £ 5 billion – as input on his intention, we see him announcing a fiscal tightening – perhaps 2% of GDP in tax increases – only in the fall, which will take effect from April 2022. “
In all, Morgan Stanley predicts that the £ 5 billion of additional tax revenue this fiscal year will rise to £ 10 billion next year.
“We believe that an additional fiscal squeeze – of 2% of GDP – will be announced in the fall, once the UK has clearly recovered from COVID-19,” they said in a note on Friday.
However, UBS’s Turner suggested that after a better-than-feared fourth quarter for the UK economy, the government’s fiscal position may not be as fragile as the OBR last reported. As a result, UBS does not expect any immediate tax increases, but suggested that future changes in corporate tax would likely be signaled along with other modest adjustments, such as pensions and freezing of income tax limits.
You shouldn’t ‘pull the rug’
The better-than-expected fourth quarter in the UK means that government forecasts can be improved, according to Capital Economics senior economist Ruth Gregory, but she cautioned that a premature reduction in fiscal support could be detrimental to the recovery. .
OBR currently projects that the economy will be 3% smaller than its pre-pandemic trajectory until 2026, with a budget deficit of around £ 100 billion (3.9% of GDP) in 2025/26.
Gregory determined that if Sunak wants the budget deficit to return to pre-pandemic levels by 2026, he may have to tighten fiscal policy by around £ 45 billion a year.
“Add the government’s desire to raise taxes sooner or later so that tax increases do not take place just before the 2024 general elections, so it is entirely possible for the chancellor to take the first steps to recover some revenue from this budget,” she said.
However, she suggested that the immediate priority will be to avoid long-term economic scarring, and Sunak, for the time being, will be content to signal the intention to restrict future tax announcements.
Capital Economics expects Sunak to announce a easing in fiscal policy from current plans, totaling around £ 25 billion (1.2% of GDP) in 2021/22.
“But the risk is that in the next two years he will be tempted to pull the rug out from under the feet of families and businesses, reducing the budget deficit at a faster rate than currently programmed,” said Gregory.
“This would not only hamper the economic recovery, but it could also cause more problems for public finances than it solves.”