Finance Minister Rishi Sunak will leave 10 Downing Street after attending a cabinet meeting on February 14, 2020.
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As UK Treasury Secretary Rishi Sunak prepares to chart the country’s economic path to recovery, analysts consider the possibility of tax hikes and a nod to future fiscal tightening.
The budget, expected March 3, comes as nationwide Covid-19 restrictions will be phased out over the next few months, culminating in full removal on June 21. Meanwhile, more than 20 million people in the UK have now received a first vaccine. dose.
Sunak told the BBC last weekend that his budget will “provide support,” but warned that the “shock to the economy” would not be a quick fix.
The government has embarked on unprecedented public spending as the economy experienced its sharpest contraction in more than 300 years in 2020. At Sunak’s latest fiscal announcement in November, he unveiled the largest peacetime budget ever.
According to Dean Turner, an economist at UBS, Sunak is widely expected to maintain some of the government’s support beams for the economy until restrictions are relaxed, notably by extending the leave regime to at least June. Worldwide asset management.
“Following the Chancellor’s announcement of a £ 5 billion ($ 7 billion) corporate subsidy scheme, we can also announce broader credit terms to businesses, as well as an extension of tax exemptions to help businesses through what will hopefully be the final phase of lockdowns and , crucially, the recovery afterward, “Turner said in a statement Monday.
Morgan Stanley analysts expect a package of measures of £ 20 billion, including an extension of leave, a targeted support program for the pandemic-prone sectors and a one-time payment to applicants affected by the expiry of the £ 20-a-week increase. to Universal Credit, the UK Social Security benefit.
Tax increases?
The UK has borne direct tax costs of £ 285 billion ($ 397 billion), or 13.7% of GDP, since the start of the pandemic, according to the Office for Budget Responsibility (OBR), which has warned of a lasting blow to the audience. finances.
As a result, some analysts cautiously expect the chancellor to look to raise some money in Wednesday’s budget.
Jacob Nell, Morgan Stanley’s chief of European economics and UK economist Bruna Skarica, said Sunak could announce tax increases, a possible corporate tax increase to 21% from the fall, along with the introduction of an online sales tax and further action against green taxes.
“The UK’s fiscal policy remains more aggressive than its US and euro area counterparts, with Chancellor Sunak emphasizing the need to restore public finances to sustainable foundations after the pandemic,” Nell and Skarica said in a note Friday.
While we expect him to sound aggressive next week and push through tax increases – maybe £ 5 billion – as a down payment on his resolution, we only see him announcing fiscal tightening in the fall – maybe 2% of GDP in tax increases. , which will take effect from April 2022. “
In total, Morgan Stanley predicts that this fiscal year’s £ 5 billion in additional tax revenue will rise to £ 10 billion next year.
“We think further fiscal tightening – of 2% of GDP – will be announced in the fall, once the UK has clearly recovered from COVID-19,” they said in a note Friday.
However, UBS’s Turner suggested that after a better-than-feared fourth quarter, the government’s fiscal position may not be as fragile for the UK economy as last reported by the OBR. As a result, UBS does not expect immediate tax increases, but suggested that future corporate tax changes would likely be signaled, along with other modest adjustments, such as pensions and the freezing of income tax thresholds.
Shouldn’t ‘take the rug off’
The UK’s better-than-expected fourth quarter means government forecasts may be revised, said Capital Economics senior economist Ruth Gregory, but she warned that a premature ending of fiscal aid could hurt the recovery.
The OBR currently forecasts that the economy will be 3% smaller than the pre-pandemic trajectory by 2026, with a budget deficit of around £ 100 billion (3.9% of GDP) in 2025/26.
Gregory noted that if Sunak wants the budget deficit to return to pre-pandemic levels by 2026, he would have to tighten fiscal policy by about £ 45 billion a year.
Add to that the government’s desire to increase taxes sooner rather than later so that tax increases do not occur just before the 2024 general election, then it is entirely possible that the Chancellor will take the first steps to bring some revenue into this budget. to be recovered, ”she said.
However, she suggested that the immediate priority will be to prevent long-term economic scars, and Sunak will be content for now to indicate its intention to tighten on future tax announcements.
Capital Economics expects Sunak to announce a relaxation of its fiscal policy from current plans at a cost of approximately £ 25 billion (1.2% of GDP) by 2021/22.
“But the risk is that, for the next two years, he will be tempted to pull the carpet from under the feet of households and businesses by cutting the budget deficit faster than currently planned,” said Gregory.
“That would not only undermine the economic recovery, but it could also cause more problems for public finances than it solves.”