On balance, I think Rishi Sunak got more things right than wrong in Wednesday’s Budget. Let’s start with a couple of positives.
First, he extended the most important support measures, including the uplift to Universal Credit and the furlough scheme, until the end of September. This is probably longer than strictly necessary because the remaining lockdown restrictions could all be lifted by 21st June. But it does make sense to continue this support in the meantime and to minimise uncertainty for businesses and households.
There was also a good case for asking employers to contribute more to the furlough scheme from July, as the Chancellor has now done. Continuing the scheme on its current terms after restrictions have been lifted could lock people into jobs that are no longer viable and delay the adjustment to the ‘new normal’, whatever that may be.
Some will still say that Rishi Sunak should have announced these extensions sooner. However, the economy and labour market have held up better than most had expected over the last few months. Unemployment has already stabilised, and employment surveys have brightened, so there is little evidence that the delay did any real harm.
Second, the Chancellor got the tone of his speech about right, helped here by the more upbeat forecasts from the independent OBR. These allowed the Chancellor to say that economic activity is projected to be back at pre-Covid levels by mid-2022, half a year earlier than previously expected, and that the unemployment rate should now peak at 6.5%, which would be much lower than many had feared.
For what it’s worth, my own forecasts are even more optimistic. The economy should bounce back quickly once the brakes are taken off, with GDP returning to pre-Covid levels as soon as the third quarter of this year and unemployment peaking below 6%. We’ll see.
As well as drawing attention to the good news, the Chancellor was open about the bad news too. In particular, the section where he explained the implications of the freeze on personal allowances was admirably honest: the freeze may not break the letter of the manifesto commitments, but it still means people would be paying more in tax than they might have expected. It’s harder to call it a ‘stealth’ tax if the Chancellor himself flags it up.
Now for the bits I didn’t like. The Chancellor largely avoided the usual gimmicks, but there was still one: the new ‘mortgage guarantee scheme’. This will simply make it easier for young people to overstretch themselves in the housing market, while artificially stoking demand and house prices even further. The focus should have been on increasing the supply of housing instead.
My loudest boo is reserved for the plan to raise the main rate of corporation tax from 19% to 25% in 2023. This was more aggressive than anyone had expected – and a big gamble.
The Chancellor did at least resist the temptation to raise corporation tax now, and he has provided businesses with some welcome certainty about the future. Smaller companies will also avoid the full increase.
Nonetheless, ‘big’ companies are just as likely as smaller ones to pass the tax on – to consumers as higher prices, to workers in the form of lower wages and fewer jobs, and to everyone as lower investment.
The Chancellor has tried to address the last point with a ‘super-deduction’ – a 130% first-year capital allowance which will allow companies to cut their tax bill by up to 25p for every £1 that they invest in plant and machinery.
However, this tax break will only apply until 31st March 2023. It will therefore bring forward some investment now, then expire just when the new higher rate of corporation tax kicks in, Put another way, it will only be temporary, whereas the hike in corporation tax is (presumably) permanent.
I also think investment will surge anyway as Covid and Brexit uncertainty eases. In the meantime, this is a further complication of the tax system, and might actually encourage some wasteful investment to take advantage of the temporary tax break.
Nor is it good enough to say that the UK will continue to have a relatively low rate of corporation tax, even at 25%. This would still represent a sharp rise from the current rate of 19%, making the UK less competitive than it would otherwise have been. In addition, the UK’s effective corporate tax rate is already close to the OECD average once the less generous allowances in the current system are taken into account.
In summary, though, this Budget wasn’t a bad effort in terms of either style or substance. This should now be it in terms of tax increases too.
The Chancellor’s willingness to raise taxes even when the economy is in the midst of the worst recession in over three hundred years is at least a clear signal – to his colleagues and to the public – that the government cannot continue borrowing at these levels without some painful consequences. Hopefully, this will help to keep spending down in future.
Indeed, if the economy rebounds as quickly as now seems likely, the Chancellor has already done more than enough to fill any hole in the public finances. This should allow tax cuts to resume soon, fingers crossed.
This piece was first published by CapX on 3rd March 2021