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 in England, 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 the former chancellor Philip Hammond urging Boris Johnson to drop some of his populist spending pledges in the face of the pandemic, and the 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 pickup 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.
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.
Sunak also plans to incentivise lenders to provide mortgages to first-time buyers and current homeowners, with just 5% deposits to buy properties worth up to £600,000. The government will offer lenders the guarantee they require to provide mortgages covering the remaining 95%
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.
In an interview with the Financial Times, the chancellor said there was a need to “level with people” over Britain’s public finances, which he said are under “enormous strains”.
“There are some people who think you can ignore the problem,” Sunak said. “And, worse, there are some people who think there isn’t a problem at all. I don’t think that.
“We now have far more debt than we used to and because interest rates … at least a month or two ago were exceptionally low, that means we remain exposed to changes in those rates.”
Sunak has announced an expansion of Treasury support in anticipation of rising unemployment as the furlough ends. A new flexi-apprenticeship scheme will allow people to work for more than one employer in a sector, cash incentives will be increased for firms taking on apprentices and there will be an extra £126m of funding for traineeships.
Sunak said: “Our Plan for Jobs has spread opportunity and hope throughout the crisis – helping people back into work and harnessing their talents for the future. We know there’s more to do and it’s vital this continues throughout the next stage of our recovery, which is why I’m boosting support for these programmes, helping jobseekers and employers alike.”