Chancellor of the Exchequer 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 to recovery, analysts are weighing the possibility of raising taxes and a sign of the upcoming fiscal tightening.
The budget, to be launched on March 3, comes as Covid-19 restrictions nationwide will be phased out in the coming months, culminating in the complete elimination on June 21. Meanwhile, more than 20 million people in the UK have now received a 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 engaged in unprecedented public spending as the economy records the strongest contraction in 300 years in 2020. In Sunak’s latest fiscal announcement in November, it revealed the country’s largest peacetime budget. .
Sunak is generally expected to keep some of the government’s backbone for the economy until restrictions are eased, especially extending the progress chart until at least June, in an attempt to prevent an unemployment crisis, according to Dean Turner. economist at UBS Global Wealth Management.
“Following the Chancellor’s announcement of a £ 5 billion ($ 7 billion) subsidy scheme for the company, we may also see more generous lending conditions to companies, as well as an extension of the exemptions. charges to help firms through what we hope will be the blocking phase and, crucially, the subsequent recovery, “Turner said in a statement Monday.
Morgan Stanley analysts anticipate a £ 20 billion package of measures, including an extension of the workforce, a targeted support program for pandemic-sensitive sectors and a one-off payment for claimants affected by the £ 20 impulse expiration per week on Universal Credit, the British social security payment.
Tax increases?
The UK has taken on 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 has warned of a lasting impact on public finance.
As a result, some analysts cautiously expect the chancellor to seek to raise some money in Wednesday’s budget.
Morgan Stanley, head of European economy Jacob Nell and British economist Bruna Skarica, said Sunak could announce tax increases, promoting a potential profit tax increase of up to 21% in the fall, along with the introduction of an online sales and stock tax on green taxes.
“The UK’s fiscal stance remains tougher than its US and eurozone counterparts, with Chancellor Sunak stressing the need to put public finances back on a sustainable footing after the pandemic,” Nell and Skarica said in a note on Friday.
“While we expect him to look crazy next week and deliver some tax increases – maybe £ 5 billion – as an advance on his intention, we see him announcing a fiscal tightening – maybe 2% of GDP in tax increases – only in autumn, to enter into force in April 2022. “
In total, Morgan Stanley predicts that the fiscal year of 5 billion pounds of additional tax revenue will amount to 10 billion pounds next year.
“We believe that an additional fiscal tightening – of 2% of GDP – will be announced in the autumn, once the UK clearly recovers from COVID-19,” they said in a note on Friday.
However, UBS’s Turner suggested that after a better-feared fourth quarter for the British economy, the government’s fiscal stance may not be as fragile as last reported by OBR. Consequently, UBS does not expect immediate tax increases, but suggested that future changes in corporate income tax could be signaled along with other modest changes, such as pensions and the freezing of income tax thresholds.
You don’t have to “take the carpet out”
Britain’s fourth quarter, better than expected, means the government’s forecasts could be updated, according to British economics chief economist Ruth Gregory, but warned that a premature unfolding of fiscal support could hurt recovery.
Currently, OBR estimates that the economy will be 3% lower than its pre-pandemic trajectory by 2026, 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 have to tighten fiscal policy by about £ 45 billion a year.
“Add the government’s desire to raise taxes sooner rather than later, so that the tax increase does not happen even before the 2024 general election, then it is entirely possible that the Chancellor will take the first steps to recover some revenue from this budget.” ” she said.
However, she suggested that the immediate priority will be to prevent long-term economic scars, and Sunak will be content for the time being to signal its intention to raise future tax announcements.
Capital Economics expects Sunak to announce a relaxation of fiscal policy compared to current plans, amounting to around GBP 25 billion (1.2% of GDP) in 2021/22.
“But the risk is that in the next two years it will be tempted to take the carpet out of the feet of households and businesses by reducing the budget deficit at a faster pace than currently planned,” Gregory said.
“This would not only undermine the economic recovery, but could also cause more public finance problems than it solves.”