On Wednesday 3rd March, Rishi Sunak set out the details of his new budget to the House of Commons. This budget is, and ought to be, generous. The spend now, tax later approach is seeking to provide some much-needed breathing room before setting out longer term plans to get on top of spiralling pandemic debts. Balancing the books whilst effectively protecting households and business will be by no means a feat.
The government agreed for the furlough scheme to be extended, again, until the end of September. £65bn is being spent on supporting jobs and investment over the next two years, with £4bn in cuts. Planned borrowing is expected to total £234bn in 2021-22, and a 6% rise in corporation tax to 25% from 2023 is expected to raise £17bn. The finer details of other policies in this budget all point in the same direction to help Britain out of its economic slumber, without saying too much about who is going to pay for it.
There are some areas where the Chancellor failed to provide any details, such as budgeting for pandemic costs beyond this year, where Mr Sunak told Radio 4’s Today programme that he was looking for a “cross-party solution”.
Labour leader Sir Kier Starmer was the first to issue criticism calling the budget one which “papered over the cracks” with no plan to rebuild the “shattered” economy. Likewise, the SNP Westminster leader Ian Blackford accused the Government of suffering a case of “nostalgia” for austerity. He criticised the apparent lack of ambition for economic growth and failing to provide long-term security over universal credit uplifts.
This large stimulus was predictable, the real problem for the government is how to balance the fiscal scales. The Chancellor’s thoughts on postponing taxation are that “once we are on the way to recovery, we will need to begin fixing the public finances”, he told MPs on Wednesday. The Chair of the Treasury Committee and Conservative MP insists “the devil is in the detail” with the 6% corporation tax hike. But, it may not allow the UK to remain internationally competitive and instead deal another blow to foreign investor’s confidence, already put out by an exit from Europe.
The CBI, a business lobbying group, claims this “sends a worrying signal to those planning to invest in the UK” and encourages the government to focus on remaining attractive to foreign business, or risk seeing a net loss in tax revenue. However, a £25bn “super-deduction” tax break available for companies before 2023 should neutralise this red flag.
The Economist calls Sunak’s tax plans ‘evasive’; the Chancellor knows that the yield from large rises in corporation tax is often low and this begs the question whether such a tax rise will even be imposed once the “super-deduction” has ended and an election on the horizon. This move is potentially astute for political competition, the 6% tax hike forces Labour into a corner. They must decide whether to back the move, and therefore tacitly support austerity, or oppose it and be accused of snuggling up to Britain’s corporate fat cats – a policy Kier Starmer is keen to pursue, but faces significant party opposition to.
Across the pond the sentiment is similar. Biden’s administration is about to begin the process of muscling a $1.9trn stimulus package through the senate with an equally sizable infrastructure bill expected to follow. However, once everyday services begin to open up, this risks overheating the economy, which may prompt higher interest rates or other monetary policies to stave off rising price levels. These higher rates could be disastrous for emerging economies’ battling against the pandemic; a stronger dollar with larger capital outflows would further imperil finances in economies with already augmented budget deficits.
Britain is unlikely to face these same risks. Rishi Sunak’s budget will avoid the problems experienced by George Osbourne after the financial crisis, where spending was cut, and taxes were raised too soon. But getting a grip on the country’s finances is likely to prove more difficult. Perhaps more progressive methods like capital gains taxation should be used to fairly balance Britain’s growing debt.