In recent years, what with the run-up to Brexit, Budgets have been largely dull affairs.
Last year, things got a little more showy with the arrival of Rishi Sunak and, more importantly, coronavirus. But even though the chancellor got more airtime last year than some do in their entire careers (notably his predecessor), it wasn’t exactly business as usual. Sunak spent most of his time splashing the cash and thus getting to be one of the few semi-popular members of the government in the depths of the emergency.
Tomorrow however, he’ll lay out his vision for post-Covid Britain. That means this is one of the most important Budgets in a while. It’ll also give us a taste of what Sunak might be like in more “normal” times when he’s not shelling out on cheap meal deals and short-term aid packages.
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Will he signal that it’s time to start thinking about how we’ll repay all that spending? Or will his bark be worse than his bite? As usual, he might surprise us on the day, but we’ve already got more than enough leaks to go on to make an educated guess.
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House prices, capital gains tax and fiscal drag
As we all know, British GDP is made up of roughly the following components: 2% chatting about the weather, 3% football, 7% alcohol consumption, and 94% house prices (the numbers don’t add up exactly to 100% because of all of the alcohol consumption).
I’m just pulling your leg of course. Hahaha. But the government certainly acts as though house prices are the key driving force in the economy. So some of the most headline-grabbing “freebie” announcements are likely to come from that particular area.
I’d expect an extension of the stamp duty holiday (currently on houses worth up to £500,000). And also it seems that we’re also going to get a taxpayer-backed (or rather, central-bank backed) mortgage guarantee scheme for those with small deposits (and not necessarily just first-time buyers, apparently). Is that a good idea? Not if you want house prices to reach some semblance of affordability. But governments gave up on that long ago. It’ll be pitched as a way “to help the young onto the housing ladder” I’m sure.
What about austerity? What about paying back the money we’ve borrowed? We now owe nearly 100% of GDP, the highest level since 1963 (and debt was on its way down then, not continuing higher).
Well, don’t expect any move to repay it right away. We aren’t going to get out from under lockdown completely until at least mid-June. So it would be politically indefensible for the government to remove various bits of employment and industry support until then, given that it’s the reason these businesses are shut down. So presumably they’ll be extended until the end of June. Also, it’s not costing a lot to service. So we don’t have to rush to pay it back.
The US government has already committed to spending a lot more; with Britain being a bit smaller and more vulnerable to capital flows than the US, we probably won’t take quite as cavalier an attitude. We have to talk a good game to minimise any turbulence. But given a backdrop where most of the world’s biggest countries are going to be continuing to print money, that’s probably enough. Especially given that the pound remains cheap by past standards, despite its recent solid increase, which makes it harder to envisage a big sell-off any time soon.
How to fix the public finances without derailing the recovery
Some tax rises do seem likely, although the details may not be hammered out until later in the month. Capital gains tax (CGT) is the one that investors will be keeping their eyes on. A while ago, the Office for Tax Simplification put out a report recommending that CGT be aligned with income tax rates.
That would imply a significant increase in CGT. Currently it’s charged at 10% for a basic-rate taxpayer and 20% for higher-rate (add ten percentage points if it’s residential investment property). Given that income tax has a highest rate of 45%, that’s a big potential jump.
However, the tricky thing about CGT is that it’s not easy to predict how much money it would raise. CGT is paid when you sell the asset in question, and generally it’s the seller who gets to pick their timing. Indeed, the government benefited from a bump in CGT revenues after the original report encouraged some people to crystallise gains immediately rather than risk being caught out by a higher rate.
Another tax hike to bet on is “fiscal drag”. Don’t expect tax bands to rise at all. So while pension tax relief hasn’t been a big talking point in the run up to this Budget (for once), you can expect the lifetime allowance (currently sitting at just above £1.07m) to stay where it is. Note that if inflation does take off in the next few years, fiscal drag will be a real revenue-raiser.
Corporation tax apparently is likely to rise a bit too. Sunak can get away with that because, at 19%, it’s lower than other G7 countries and it’s also a politically soft target. But if he does it, he’ll have to offset it with incentives for companies to invest. He also needs to maintain the City’s competitive edge in a post-Brexit world.
The thing is, most of these moves would be tinkering around the edges. And I have to wonder about whether they make sense at this stage in the game. And that brings us to what I’m really most interested in: Sunak’s tone.
If the government really wants to tackle the debt, then most of all, it needs a resounding recovery this year. It should be encouraging us to get out there, to invest, to employ people, and to – yes – spend our money, to make the most of the comeback. It’s hard to do that if your taxes look like they’ll be shooting up, and the overriding sense is of a penny-pinching chancellor who’s looking for every opportunity to claw back a bit of spare cash here and there.
Sunak seems smart and politically savvy enough to get this. But he (and his department) are also the ones who have to look at the scary spreadsheet with those terrifying debt numbers sitting on it. Will he hold his nerve enough to avoid freaking the rest of us out? We’ll find out tomorrow.
Oh, and look out for "green" gilts. Just be aware that they might look a lot like these less-than-stellar investments.
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