Chancellor Rishi Sunak is leaving 10 Downing Street after attending a cabinet meeting on 14 February 2020.
Barcroft Media
While British Finance Minister Rishi Sunak is preparing to determine the country’s economic path to recovery, analysts are weighing the possibility of tax increases and a nod to future fiscal tightening.
The budget, which is available on March 3, comes because the Covid-19 restrictions nationwide will have to be phased out gradually over the coming months, which will be fully removed on June 21. Meanwhile, more than 20 million people in the UK have now received a first vaccine. dosage.
Sunak told the BBC over the weekend that his budget would ‘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 has shown its sharpest contraction in more than 300 years in 2020. With Sunak’s last fiscal announcement in November, he revealed the country’s largest peacetime budget on the record.
Sunak is generally expected to keep the government’s supporters of the economy until restrictions are eased, and in particular to extend the furlough scheme until at least June in an effort to stave off an unemployment crisis, according to economist Dean Turner of UBS. Global Wealth Management.
Following the Chancellor’s announcement of a £ 5bn ($ 7bn) company grant scheme, we may also see wider credit terms announced to companies, as well as an extension of tax exemptions to help businesses through what will hopefully be the last phase of lockdown and, in particular, recovery thereafter, ‘Turner said in a statement Monday.
Morgan Stanley analysts expect a £ 20bn package package, including a further extension, a targeted pandemic-sensitive sector support program, and a one-off payment to benefit claimants affected by the expiry of the £ 20-per-share boost week to Universal Credit, the UK payment of social security.
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 some cash in Wednesday’s budget.
Morgan Stanley, head of the European economy, Jacob Nell, and the British economist, Bruna Skarica, said Sunak could announce tax increases by offering a possible company tax increase to 21% from the autumn, together with the introduction of ‘ an online sales tax and further action in respect of green tax.
“The fiscal stance of the UK remains more hawkish than its peers in the US and the eurozone, while Chancellor Sunak stresses 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 – in installments based on his intention, we see him making the fiscal announcement – perhaps 2% of the GDP on tax increases – only in the autumn, will take effect from April 2022. “
In total, Morgan Stanley predicts that the fiscal 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 statement on Friday.
However, Turner of UBS suggested that the fiscal position of the government after a better than dreaded 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 corporate tax are likely to be indicated along with other modest adjustments, such as pensions and freezing of income tax thresholds.
Do not ‘pull out the mat’
According to British economist Ruth Gregory’s better-than-expected fourth quarter, the government’s forecasts could be upgraded, but she warns that a premature settlement of fiscal support could hurt the recovery.
The OBR currently plans for the economy to be 3% smaller than its pre-pandemic orbit 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 a desire to the government to raise taxes sooner rather than later so that tax increases do not take place just before the general election in 2024, 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 the prevention of long-term economic scars, and Sunak would be content to sharpen future fiscal announcements for the time being.
Capital Economics expects Sunak to announce a weakening in fiscal policy in 2021/22 with current plans amounting to 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 faster than currently planned,” Gregory said.
“It will not only undermine the economic recovery, but it can also cause more problems for public finances than it solves.”