Ahead of the government’s economic update, we consider what could be on Chancellor Rishi Sunak’s agenda as the Treasury seeks to grapple with the rising public debt driven by the Covid-19 relief measures and looming economic recession.
According to the Office for Budget Responsibility (OBR), in May of 2020 UK public debt exceeded GDP for the first time since the 1960s. Data from the IIF in April of this year revealed that, at over 322% of GDP, global debt is now 40 percentage points ($87 trillion) higher than at the onset of the 2008 financial crisis.
With UK government spending up by almost 50% year on year, and tax receipts down by almost the same figure, the impact of the Coronavirus lockdown and associated recessionary environment is beginning to be keenly felt. At the same time, Brexit remains on the horizon and the UK’s finances face an uncertain immediate future after the end of the transition period.
With Chancellor Rishi Sunak expected to announce a new package of stimulus this week to reinvigorate the economy and bolster tax receipts, Zena Hanks, a partner in Saffery Champness’ Private Wealth Group, offers insight on what tax impacts may on the horizon for the summer and beyond:
“The Coronavirus recovery will be one of the biggest economic tests faced by any Chancellor. With lockdown beginning to ease further, the government will have high hopes that people will start to get out and about and spend, driving economic activity and ultimately tax receipts. We have already seen a significant uptick in property transactions, for example, since restrictions were lifted on estate agents holding viewings.
“But mounting public debt is a harsh reality to face, and will be an anathema to any Conservative government geared towards fiscal responsibility. The debt will have to be paid, but with a fragile economy and jobs cuts starting to bite it will be interesting to see what choices the Chancellor makes with regard tax rises to bolster the national coffers.
“The indications so far are that we won’t see major tax reforms in July, with government signalling that it will wait until the outcome of the delayed spending review and the Autumn Budget to implement any significant changes. But it is rare for Chancellors to turn down an opportunity to show their fiscal sleight of hand and there is always the possibility that a rabbit may appear from Mr Sunak’s hat sooner than expected.
“In such a politically sensitive environment it seems unlikely that the government would impose anything too onerous on the working public, which would alienate those it has supported through reliefs such as the job retention scheme. However, speculation continues to mount regarding a wealth tax, perhaps rebranded as an NHS tax, which could be a tax on overall assets, including land, rather than income. This kind of policy will always need careful scrutiny given the potential risks it poses to, say, retirees who may have benefited by rising house prices but who have no additional income to support day-to-day living.
“Likewise, some tweaks for pensions and pensioners could unlock a significant boon for the Treasury. NIC relief on pension contributions was projected to cost almost £20 billion in 2019-20, which would make a significant dent in the cost of the furlough scheme – expected to be around £60 billion – and would likely be seen by government as a fairly uncontroversial target for reform.
“While there is no moral compass, informed by public opinion, to guide the government in targeting specific sectors for tax rises, such as there was in the 2008 financial crisis, there will likely be some hungry looks cast at those entities who have profited considerably in recent years and during the pandemic and lockdown. Namely, the technology giants. The Chancellor announced in the Budget the implementation of the new 2% Digital Services Tax from April 1st, and this new revenue stream will doubtless be welcome. But further change may be on the horizon, with Rishi Sunak already planting his flag firmly in the ground when he backed EU finance ministers in their talks with the US on the taxation of technology multinationals. Watch this space.
“More generally, though, it is difficult to imagine there being any significant revenue raising without increasing some or all of income tax, corporation tax, VAT or NIC at some point. But fundamentally the key test for the Chancellor will be getting his timings right – and balancing providing the right reliefs to stimulate economic recovery with raising taxes or cutting back on other reliefs to pay for it.”