Why Rishi Sunak can’t answer the UK’s big question of taxes3 min read . Updated: 29 Nov 2020, 09:04 PM IST
Uncertainty looms too large to say who’ll pick up the stimulus tab
UK Chancellor of the Exchequer Rishi Sunak didn’t need to explain why his government is spending and borrowing so much when he issued his budget statement Wednesday. That much was obvious: The independent Office for Budget Responsibility forecast the country’s economy will shrink by 11.3% this year, the largest fall in output in 300 years. Even by 2025, the country’s economy will be 3% smaller than it was when Sunak delivered his March budget. Britain’s “economic emergency has only just begun," he warned.
But like the many other times when the chancellor had to announce rafts of new spending, the real questions were ones he can’t answer: Will this next round be enough? What does it mean for taxes?
The review covered day-to-day government spending for the next year. Sunak announced £55 billion for tackling the pandemic. There is also a new National Infrastructure Strategy, investments in homebuilding and subsidies for public transport and faster broadband. He increased the minimum wage for those aged 23 and over, and allocated money for helping the unemployed back into work. There’s a large increase for defence spending and money for the government’s environmental agenda. Sunak repeatedly referred to “the people’s priorities" in setting out his programme. Despite freezing public sector pay for many workers, there was a little something for just about everyone else.
While the scale of spending is making some of Sunak’s fellow Conservatives nervous, Britain can afford the largesse for now and indeed has little other choice. Public debt has crossed the 100% of gross domestic product threshold, but low borrowing costs have made that a secondary consideration.
Although the question of how to pay for all this lingers, Sunak was right to postpone any discussion of revenue-raising measures. The government wants people spending, hiring and investing again, and talk of tax increases tends to spoil the party. Some changes to the capital-gains tax structure are expected.
But the success of his current spending measures—and what tax hikes the government will consider—still depend on at least three factors beyond Sunak’s control.
The first is a UK vaccination programme. That seems to be in the bag. Britain has on order 40 million doses of the Pfizer-BioNTech vaccine and 100 million doses of the Oxford University-AstraZeneca shot, as well as 5 million doses of Moderna’s vaccine. What needs to happen next is regulatory approval followed by a smooth roll-out. Still, there are unanswered questions around the Oxford vaccine’s efficacy. If it turns out to be substantially less effective than the Pfizer and Moderna alternatives, that will raise prickly issues: Would Brits be happy with a vaccine that’s only 60% or 70% effective if Americans and Germans are getting one that is 95% effective? If not, that could delay uptake.
The second factor is Brexit, a word that isn’t mentioned much by the government these days. There are probably only days left in which to conclude a trade deal with the EU. The bare-bones version that’s on offer will have costs for consumers and the UK economy generally, but leaving the single market with no deal is a plunge into the unknown. In testimony before the Commons Treasury committee this week, Bank of England Governor Andrew Bailey said a no-deal exit would cause greater long-term damage than covid. The OBR says that due to Brexit, UK output will be 4% lower than if Britain had remained an EU member—but leaving with no deal would wipe out another 2% of output initially. While covid has ravaged hospitality, transport and non-tradable service sectors, manufacturing, financial services and other tradable areas will suffer from leaving without a deal.
The final factor that’s important for spending was alluded to in the last part of Sunak’s statement: “Today the government has funded the priorities of the British people; now the job of delivering them begins." It’s easy to dish out funds during a crisis, the challenge is spending it well.
The UK economy may bounce back better than many assume. The OBR forecasts suggest a structural deficit (what’s left when the emergency measures are removed) of 4.5% of GDP in four years’ time. How much revenue raising is then needed to bring that down will depend in part on the government’s fiscal rules.
And any one of these three critical factors—the vaccination programme, Brexit, and the delivery of public investment programmes—could throw the UK’s latest budget plan off course yet again. For now, Sunak is right to keep the spending going while postponing talk of taxes. Britain’s workers and its economy need all the help they can get.
Therese Raphael is a columnist for Bloomberg Opinion