Tax increases, further expansions, hawkish tone: forecasts for the UK budget

Chancellor Rishi Sunak is leaving 11 Downing Street to announce the Treasury’s one – year spending review at the House of Commons in London, England, on 25 November 2020.

David Cliff / NurPhoto via Getty Images

LONDON – British Finance Minister Rishi Sunak will on Wednesday announce the extension of the country’s scheme to the end of September and is expected to say the government will use its full “fiscal firepower” to support the economy.

The budget comes because nationwide Covid-19 restrictions must be phased out over the coming months, which will be fully removed by June 21st. Meanwhile, 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 navigate the UK’s economic recovery in terms of current fiscal measures and plans to recover the country’s devastated public finances in the future. He also plans the next phase of the Government Plan for Work, which was launched in October.

The Coronavirus Jobs Retention Scheme will continue to subsidize 80% of the wages of employees added on an ongoing basis until the end of September, but businesses will be asked to contribute 10% in July and 20% in August when the economy reopens.

“There’s now light at the end of the tunnel with a road map for reopening, so it’s just right that we continue to help businesses and individuals through the difficult months ahead – and beyond”, Sunak is expected to say.

The government has embarked on unprecedented public spending because the economy has shown its sharpest contraction in more than 300 years in 2020. With Sunak’s last fiscal announcement in November, he set the country’s largest peacetime budget on record.

In addition to expanding the furlough scheme, Sunak is expected to provide further social security measures, business grants, loans and mortgage holidays, as well as grants for self-employed businesses and updates to work schemes. He will also extend the £ 20-a-week boost to Universal Credit, the UK social security payment, until September.

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

Morgan Stanley analysts expect a £ 20bn package of measures, including further expansion and a targeted pandemic-sensitive sector support program.

Future tax increases?

The UK has assumed a direct fiscal 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 the public a lasting hit has finances.

As a result, some analysts expect the chancellor to be careful about raising money in Wednesday’s budget.

Morgan Stanley, head of the European economy, Jacob Nell, and British economist Bruna Skarica said Sunak could announce tax increases by a possible increase in corporate tax to 21% from the drop, along with the introduction of an online sales tax and further action in respect of green taxation.

“The UK’s fiscal stance remains more hawkish than its peers in the US and the eurozone, while Chancellor Sunak stressed the need to make public finances sustainable again after the pandemic,” Nell and Skarica said in a note on Friday. said.

‘While we expect him to sound hawkish next week and deliver some tax increases – perhaps £ 5bn – as installments based on his intention, we see him making the fiscal announcement – perhaps 2% of GDP. tax increases – only in the autumn, will take effect from April 2022. “

In total, Morgan Stanley predicts that the financial year’s additional £ 5 billion in tax revenue will rise to £ 10 billion next year.

“Further fiscal tightening we think – of 2% of GDP – will be announced in the autumn once the UK has clearly recovered from COVID-19,” they said in a note on Friday.

However, UBS economist Dean Turner has suggested that the government’s fiscal position after a better-than-feared fourth quarter for the UK economy may not be as fragile as the OBR last reported. As a result, UBS does not expect any immediate tax increases, but proposed future changes to company tax are likely to be indicated along with other modest adjustments, such as pensions and the freezing of income tax thresholds.

Do not ‘pull out the mat’

According to the British UK economist Ruth Gregory, the government’s forecasts may be better than the UK’s better than expected fourth quarter, but she warns that a premature settlement of fiscal support could hurt the recovery.

The OBR currently predicts that by 2026 the economy will be 3% smaller than its pre-pandemic orbit, with a budget deficit of around £ 100 billion (3.9% of GDP) in 2025/26.

Gregory has determined that if Sunak wants the budget deficit to return to pre-pandemic levels by 2026, he may need to step up fiscal policy by about £ 45 billion a year.

‘Add a desire to the government to raise taxes sooner rather than later so that tax increases do not take place just before the 2024 general election, then it is quite possible that the chancellor will take the first steps to cut back some revenue in this budget pull, “she said.

However, she suggested that the immediate priority would be to prevent long-term economic damage, and Sunak would be content for the time being with a view to tightening up on future fiscal announcements.

Capital Economics expects Sunak to announce a weakening of fiscal policy by 2021/22 in terms of current plans of around £ 25 billion (1.2% of GDP).

“But the risk is that in the next two years he will be tempted to pull the rug out from under the feet of households and businesses by reducing the budget deficit at a faster pace than currently scheduled,” Gregory said. .

“It will not only undermine the economic recovery, but it can also cause more problems for public finances than it solves.”

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