Sunak's UK Budget strategy: first boost growth, then raise taxes

London

BRITISH Chancellor of the Exchequer Rishi Sunak's anti-pandemic Budget strategy is to first boost economic growth in the UK and then raise taxes during the recovery.

He stressed that his "immediate priority continues to be supporting those hardest hit, extensions to furlough, help for the self-employed, business grants, loans and sales tax cuts".

This policy has drawn criticism from conservative politicians and business, but he countered that the pandemic was a once-in-a-century crisis.

On Wednesday, Mr Sunak disclosed that further bailouts and aid this year will raise Covid-19 spending to £407 billion (S$755 billion).

Continued government deficits imply that Covid-19 expenses and other borrowing will be £355 billion this year and a further £243 billion in 2022, Mr Sunak said.

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The Office for Budget Responsibility (OBR) forecasts that total government debt could soar from just under £1.9 trillion at the beginning of 2020 to £2.7 trillion in five years. This amount will take "decades" to repay, Mr Sunak said.

UK government bond yields have been rising. Economists believe that despite concerns about potential inflation, the Bank of England will continue to purchase bonds via quantitative easing (QE).

If the Bank of England fails to keep bond yields down to levels of just over 1 per cent, the nation's interest burden will rise sharply.

To prevent an economic and financial crisis, Mr Sunak's aim is to keep on spending so that growth reaches 4 per cent this year and jumps by 7.3 per cent in 2022.

Company profitability should then improve by 2023, allowing the government to raise tax by a whopping 6 points to 25 per cent for companies earning more than £250,000.

Many conservatives are furious with this move as they fear that it will curb foreign investment.

"Raising corporate tax to 25 per cent in one leap will cause a sharp intake of breath for many businesses," said Tony Danker, director-general of the Confederation of British Industry. "It sends a worrying signal to those planning to invest in the UK."

Individual tax thresholds will also be frozen for five years from 2022 onwards.

The tax rate is currently zero up to the first £12,500 of a person's annual income, going up to 20 per cent up to £50,000, to 45 per cent from £50,000 to £150,000, and 50 per cent thereafter. The overall tax burden will thus rise from 33 per cent in 2019 to 35 per cent, the highest level in 50 years.

Labour leader Keir Starmer maintained that the Budget "fell far short of the transformative change needed to turbocharge recovery".

Some observers were more understanding and impressed with Mr Sunak's policies to regenerate the slack economy.

For a start, the higher company tax of 25 per cent will still be lower than the levels in the US, France and Germany.

Mr Sunak has also introduced an exceptional tax allowance of 130 per cent in the next two years. It will apply to new direct investment in research, factories, plant and equipment.

For example, if pre-tax profits are £2 million and direct investment is £1 million, as much as £1.3 million would be deducted from the tax bill. Economists say this should create more jobs as a result.

"The tax super deduction for investments provides a very strong incentive for businesses to invest now rather than later," said OBR chairman Richard Hughes.

Other business incentives are infrastructure spending in the north and midlands and green developments to counter climate change.

Mr Sunak also intends establishing eight English freeports. These ports allow raw materials and goods to be processed and re-exported efficiently and cheaply without import duties.

The zones can stretch as far as 40km and link other areas in new designated "tax sites". The ports are aimed at increasing investment and jobs in the chosen areas.