Rishi Sunak’s tax options are hemmed in by the Tory manifesto | Budget

The nights are getting longer and it will soon be decision time for the chancellor. Rishi Sunak’s emergency measures, most notably the furlough scheme, have shielded the UK from much of the pain caused by a contraction in the economy unsurpassed in modern history but the help has come at a cost.

In the first four months of the current financial year alone the government has borrowed more than £150bn and that figure is expected to more than double by March 2021. Sunak has four options in the budget planned for late this year: boost growth by cutting taxes and raising spending; leave things as they are; take steps to cut the deficit immediately; or pre-announce measures to raise taxes or cut spending to come in later. He could also combine some of these options, by providing short-term stimulus but outlining taxes to come into force in 2022.

According to some reports, the chancellor is working on a package of eye-watering tax increases in the autumn budget, most of them aimed at the better off. The Treasury dismisses talk of higher corporation tax, capital gains tax (CGT), less generous pension tax relief, and higher fuel duty as speculation and says it is far too early to say what will be in the budget. It sees the hand of Tory rightwingers at work seeking to create such a storm that the chancellor will be forced to rule out tax rises.

As a fiscal conservative, Sunak is certainly uneasy about how much the state is borrowing but he is also aware that the recent pick up in activity could peter out as the furlough scheme is wound down and mortgage payment holidays end. He will want to see how the economy pans out over the next couple of months before deciding whether it is feasible to start raising taxes.

Some things are off limits. Boris Johnson gave a guarantee in last year’s Conservative manifesto that there would be no increases in the rates of income tax, national insurance and VAT for the whole of this parliament. That would be a tough pledge to break, even though all three represent much bigger sources of revenue than, for example, raising CGT. A penny on income tax would raise £4.7bn next year, a penny on employees NICs £4.5bn, and an increase in the standard rate of VAT from 20 to 21% £6.85bn. Extending VAT to food, currently zero-rated, would net the exchequer around £18bn a year, but is a political non-starter.

Nearly all the options available to the chancellor have been tried by his predecessors in the past. Governments after the second world war were faced with a national debt that was even bigger in percentage terms than today’s but gradually whittled the debt away away through a combination of economic growth and inflation. Sir Geoffrey Howe raised tax in the 1981 budget even though unemployment was going up rapidly, and more recently George Osborne imposed austerity measures while the UK was in the early stages of recovery from the 2008 financial crisis. John Major’s government pre-announced tax increases designed to come into force after the economy had time to recover from the recession of the early 1990s.

While previous chancellors have faced some testing budget decisions, none in living memory have done so during a health emergency. The economy has performed better than Sunak feared it would at the start of the crisis but the number of Covid-19 cases, already rising as lockdown restrictions have been eased, is expected to increase as colder weather arrives. Sunak’s budget could easily coincide with more local lockdowns and a more risk averse mood among consumers worried both about catching the virus and losing their jobs. The chancellor will not want to see the work he has done to shore up the economy squandered, which suggests a budget where the immediate needs of the economy trump future prudence.

Source: The Guardian

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