BREAKING NEWS

Sunak plots tax raid to plug UK budget deficit

Bloomberg London

Saturday، 27 February 2021 09:37 PM

When Rishi Sunak comes to deliver his budget on Wednesday, the chancellor of the exchequer faces a battle to persuade his colleagues of the need to turn down the flow of government spending, and to address the painful hole in the public finances, approaching 400bn pounds ($558bn).
The question he’s still grappling with is how to pay the bill. Will he raise taxes, hitting the wealthy and clawing back profits from the few businesses that made them, as some suggest? Or will he prepare the ground for cuts to public spending? Or will he instead signal that the pain of cuts and taxes will have to come, but just not yet?
Sunak’s answers will shape his own fortunes, the Conservative government’s political identity, and the UK economy’s chances of making a full recovery from its deepest recession for 300 years.
“We went big, we went early, but there is more to come and there will be more to come in the budget. But there is a challenge,” with public finances and “I want to level with people about the challenge,” Sunak told the Financial Times in an interview.
In common with finance ministers around the world, Sunak poured out vast sums of taxpayers’ cash to save jobs and businesses when coronavirus forced the government to shut shops and restaurants and confine people to their homes.
Now that Prime Minister Boris Johnson has laid out his “road map” for a cautious four-month lifting of the lockdown, Sunak is reconciled to keeping that flow of support going for as long as the restrictions are in place.
That will mean extending the 54bn-pound furlough wage support program, along with cuts to business rates and sales tax at least until the end of June. This won’t be a surprise to Sunak’s colleagues and will please many, but not all, Conservative members of Parliament on Wednesday. But it runs against the grain of his instincts as a small-state Conservative, and many of his colleagues are also deeply uneasy about the economic policy their Tory government finds itself pursuing. The prospect of hiking taxes – including potentially a sharp rise in business levies – to pay the bill is particularly hard for most Tories to swallow.
In recent weeks, the chancellor has been working assiduously to canvass his colleagues’ views in an effort to understand what he’s up against and tailor his messages to match. Some MPs report being invited to four or five Zoom calls with Sunak in the run-up to his budget.
“Rishi was very open, very listening, really cared about what we were saying,” said Alexander Stafford, one of the new Tory MPs elected in December 2019. “We all know there are going to be cuts or tax rises. 
My hope is none of that falls too hard at the moment. We’re not out of the woods yet.” Others put it more bluntly. “If he were to raise taxes, it would undermine everything we’ve done to get businesses to this stage,” said Andrew Bridgen. “No society can ever tax its way to prosperity.”
What will be in Sunak’s budget?
* A new state-backed loan programme to help companies recover from the pandemic
* Extensions to the main virus support measures, including the furlough programme, a reduction in VAT and the business rates holiday
* More details on how a proposed infrastructure bank will work
* An extension to the 20 pounds uplift in universal credit, a welfare payment
* 126mn pounds of new funding for 40,000 traineeships
* A signal that Corp tax is set to rise
* A freeze on the pension lifetime allowance, according to the Times newspaper
* A fourth round of 3-month grants to self-employed people at up to 80% of their pre-pandemic earnings
Steve Baker, a Tory who sits on the Treasury committee and will interrogate Sunak on his choices, said the government’s priority must be to create better-paid jobs for people in the months ahead. “I just don’t see how raising taxes promotes more, better, higher paying jobs for the public,” he said.
The pandemic has fundamentally challenged the Tory party’s sense of what it stands for. In the past, Conservatives have flirted with privatising state healthcare, cut welfare payments, and slashed taxes for high earners.
Yet Johnson’s team now paints itself as the champions of the National Health Service while pumping up social security and weighing options to raise levies on capital gains.
The influx of more than 100 new Conservative Members of Parliament in 2019, many of them representing northern seats prised from the left-wing Labour Party for the first time in decades, has changed the makeup of the party in Westminster.
There’s less clamour for fiscal prudence than in years gone by, and there’s certainly no appetite for the return of the austerity policies pursued over much of the last decade by Tory-led administrations.
Historically low interest rates mean there also isn’t pressure from the bond markets on the chancellor to rein in his spending immediately. While the country’s debt has ballooned during the crisis, the cost of servicing it has actually fallen.
Yet Sunak sees big risks in doing nothing to address the UK’s pandemic-ravaged public finances. Even if he delays most of the difficult decisions until the next budget in the fall, or even next year, many of his colleagues expect he won’t be able to put off the pain any further.
Bond markets are signalling that Sunak’s borrowing costs may only get higher. Interest rates on gilts in financial markets have risen a half percentage point in the past month for securities maturing in six years and beyond. 
The yield on the Treasury’s benchmark 10-year gilt reached 0.836% on Friday, the highest since March 2020 when the pandemic began spreading widely in Europe. 
Every 1 percentage-point increase in interest rates adds 25bn pounds to the UK’s cost of servicing its debt, Sunak told the FT.
“We all know that the markets can turn very, very quickly,” Harriet Baldwin, a Conservative who traded bonds during a market rout in 1994. “Although the situation is very favorable at the moment, it’s not necessarily always going to be the case. He’s got a tricky tightrope to walk.”
The biggest factor in determining whether Britain’s economy is permanently scarred or recovers quickly lies beyond the chancellor’s control: the pandemic itself.
If, despite a fast and apparently effective vaccination programme, Johnson’s government cannot keep a grip on coronavirus, the UK’s plan to reopen the economy on a cautious timetable of dates over the next four months will be at risk. So too will party unity.

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