Finance Chancellor Rishi Sunak is leaving 10 Downing Street after attending a cabinet meeting on February 14, 2020.
Barcroft Media
As British Finance Minister Rishi Sunak prepares to set the country’s economic path towards recovery, analysts are weighing in on the possibility of tax hikes and a nod to future fiscal tightening.
The budget, scheduled for March 3, comes as Covid-19 restrictions nationwide will be phased out over the coming months, culminating in total elimination on June 21. Meanwhile, more than 20 million people in the UK have received the first vaccine. dose.
Sunak told the BBC over the weekend that his budget would “provide support”, but warned that “shock to the economy” would not be a quick fix.
The government has embarked on unprecedented public spending as the economy recorded the most intense contraction in more than 300 years in 2020. In Sunak’s latest fiscal announcement in November, it unveiled the most budget great of the country in time of peace.
Sunak is generally expected to maintain some of the government’s support barriers to the economy until restrictions are eased, most notably by extending the advance plan until at least June to avert the unemployment crisis. , according to Dean Turner, UBS economist. Global wealth management.
“Following the chancellor’s announcement of a £ 5bn ($ 7bn) business grant system, we can also see more generous loan terms to companies announced, as well as an extension to exemptions prosecutors to help companies through what we expect to be the final phase of closures and fundamentally the subsequent recovery, “Turner said in a statement Monday.
Morgan Stanley analysts anticipate a £ 20bn package of measures, including a furlough extension, a specific support program for pandemic-sensitive sectors and a one-time payment to benefit claimants affected by the expiration of the pandemic. increase of 20 pounds weekly. to Universal Credit, the British social security payment.
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 Budgetary Responsibility (OBR) , which has warned of lasting success for the public finances.
As a result, some analysts cautiously expect the chancellor to seek to raise cash in Wednesday’s budget.
Morgan Stanley’s head of European Economy Jacob Nell and British economist Bruna Skarica said Sunak could announce tax hikes, promoting a potential corporate tax increase to 21% from the autumn , along with the introduction of an online sales tax and a new green tax action.
“The UK’s fiscal stance remains more blatant than its US and euro area counterparts, with Chancellor Sunak stressing the need to put public finances back in sustainable shape after the pandemic,” said Nell and Skarica in a note Friday.
“While we expect it to look baffling next week and provide some tax hikes (perhaps £ 5bn) as a down payment according to its intention, we see it announcing a fiscal tightening (perhaps 2% of GDP in tax hikes) only in the fall, which will take effect from April 2022 “.
In total, Morgan Stanley predicts that this year’s additional tax revenue of £ 5bn will amount to £ 10bn next year.
“We believe a new fiscal tightening, of 2% of GDP, in the autumn, 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 British economy, the government’s fiscal position may not be as fragile as reported by the OBR last time. As a result, UBS does not expect any immediate tax increases, but suggested that future changes in corporation tax would occur along with other modest changes, such as pensions and the freezing of income tax thresholds.
You don’t have to “remove the carpet”
Better-than-expected UK fourth quarter means government forecasts could improve, according to Ruth Gregory, senior economist at UK Capital Economics, but warned that premature development of tax support could hurt the recovery .
Currently, the OBR predicts that the economy will be 3% smaller than its pre-pandemic trajectory in 2026, with a budget deficit of about 100 billion pounds (3.9% of GDP) in 2025/26.
Gregory determined that if Sunak wants the budget deficit to return to pre-pandemic levels by 2026, perhaps he should cut fiscal policy by around £ 45 billion a year.
“Add the government’s desire to raise taxes sooner rather than later so that tax increases do not occur just before the 2024 general election, then it is entirely possible for the chancellor to take the first steps to recover some revenue in that budget, “she said.
However, he suggested that the immediate priority will be the prevention of long-term economic scars, and Sunak will now settle for indicating the intention to step up in future tax announcements.
Capital Economics expects Sunak to announce a loosening of fiscal policy relative to current plans by approximately £ 25 billion (1.2% of GDP) by 2021/22.
“But the risk is that over the next two years it will be tempted to take the carpet off the feet of households and businesses by reducing the budget deficit at a faster rate than currently anticipated,” Gregory said.
“This would not only undermine the economic recovery, but could also cause more problems for public finances than it solves.”