Rishi Sunak will use the volatility in global financial markets to ram home a budget message next week that immediate action is needed to repair the damage to the public finances caused by the Covid-19 pandemic.
Despite the deep downturn caused by the third nationwide lockdown, the chancellor – who has been closely monitoring market moves – will announce the first steps towards reducing the biggest peacetime deficit in Britain’s history.
Measures to reduce the gap between government tax income and spending are expected to include lifting the corporation tax rate to 23% from the current rate of 19% over the parliament, and increasing capital gains tax.
Tax increases will be phased in after the lockdown has been lifted, and focused on higher earners and corporations – but they are likely to infuriate some Conservative backbenchers, many of whom have cautioned against clobbering the recovery by hitting businesses.
Conservative grandees have waded into the debate in recent days, with former chancellor Philip Hammond urging Boris Johnson to drop some of his populist spending pledges in the face of the pandemic, and former prime minister David Cameron telling CNN that immediate tax increases “wouldn’t make any sense at all”.
Whitehall sources said Sunak’s determination to start the work of fiscal consolidation had been strengthened by recent moves on financial markets.
Investors have had a jittery week amid fears that effective vaccines and Joe Biden’s $1.8tn stimulus plan will lead to a rapid global recovery and a pick up in inflation. That fear has led to yields – or interest rates – on government bonds rising.
As well as allowing Sunak to burnish his credentials as a responsible steward of the public finances after the Covid splurge, increasing taxes on businesses will throw down the gauntlet to Labour, which will have to decide whether to support the measures.
Keir Starmer has insisted that “now is not the time for tax rises on families and businesses”, and Labour is urging Sunak to focus on boosting growth and supporting businesses in the short-term.
But the chancellor is likely to seek to capitalise on that stance. “Anyone who is suggesting that there isn’t a problem with the public finances, or ignoring it, is just not being honest with the British people, and that’s what Rishi is going to do next week,” said a Treasury source.
Sunak will say that every percentage point rise in market interest rates adds around £25bn a year to servicing the huge borrowing required to pay for furloughing millions of workers, supporting business and funding higher spending for the NHS over the past year.
The independent Office for Budget Responsibility is expected to revise down its forecasts for economic growth in 2021 due to the weak start to the year. Borrowing in the 2021-22 financial year will be higher as a result of the continuation of emergency support for the economy, which will be one of the three themes of Sunak’s second budget speech.
The short-term stimulus package will include an extension of wage subsidies until June, a targeted and tapered extension of the business rates holiday, and an extra three months for homebuyers to take advantage of zero stamp duty on properties worth less than £500,000.
When Boris Johnson announced his plans for lifting lockdown on Monday, he promised not the “pull the rug” from businesses and consumers.
The temporary £20 a week increase in universal credit is also likely to be extended beyond its end-date at the start of April – but perhaps only for three months, until the end of the government’s roadmap out of lockdown.
The chancellor’s second theme will be the need to accelerate the economic recovery, with investment, infrastructure and R&D measures designed to make Britain more entrepreneurial.
Sunak will say that even after rising from 19% to 23%, UK corporation tax will be lower than the average for the G7 group of industrial nations. Businesses have been told to expect more generous investment allowances and tax credits to compensate for higher corporation tax.
“Having worked in the private sector, having invested in businesses, he will do everything to ensure that the UK remains an attractive place to come and invest,” said the Treasury source.
Honesty is expected to be the third theme of the budget, with Sunak intending to come clean with the public about the challenges the pandemic poses to the public finances.