Walking a tightrope from the House of Commons over the Thames would probably be easier than tackling the black hole in the nation’s finances caused by Covid-19.
According to the Office for Budget Responsibility, borrowing will be £394 billion for the current financial year – more than a seven-fold increase on the £55bn forecast before coronavirus.
This massive sum – the highest borrowing outside wartime – has funded a range of measures to fight coronavirus and its impact on the economy. Delivering his Spending Review to the House of Commons in November 2020, the Chancellor said the UK had spent £280bn on its response to the pandemic and intends to spend a further £55bn in 2021.
Meanwhile, the Treasury will raise more than £100bn less tax than it hoped because of the crisis. With more going out than is coming in, the Chancellor is truly between a rock and a hard place – but I suspect his response on March 3 will be much more upbeat than anticipated.
With interest rates so low, the cost of the government’s borrowing probably isn’t his biggest concern. When to end the Job Retention Scheme and the likely impact on unemployment will be further up his worry list.
Rather than hitting individuals in the pocket, and risk damaging the long road to economic recovery post-Covid and Brexit, Rishi Sunak will most likely look to businesses that reaped big profits from lockdown. One-off taxes, and levies against specific industries, could be among the means used to make firms pay up.
Precedents for this are already in place following the financial crisis, when the UK government introduced a one-off Bank Payroll Tax on bonuses exceeding £25,000 and brought forward the Bank Levy, a charge on banks for the government’s bailouts.
After ordering online became one of the easiest and most convenient ways to shop throughout the pandemic, an online sales tax could be at the front of the queue. Dubbed by some an “Amazon” tax after the online retailer’s UK sales increased by 51 per cent to almost £20bn in 2020, this would be payable by a wide range of e-commerce operators from Amazon to Asos, via Domino’s and Deliveroo.
But after welcoming online retailers with open arms and low taxation, how will the Chancellor get them to pay up? According to reports, key players have already been invited to discuss the issue with the Treasury so at the very least a consultation could be in the pipeline. Another option could be a one-off excessive profits tax, which would ensure the supermarkets also pay their share.
Speculation is mounting that there will be a “wealth tax”. Will Rishi be a latter-day Robin Hood, snatching what he can from society’s richest to protect the less well off? Unfortunately, the numbers don’t add up.
With many of the super-rich keeping their wealth offshore, there is no evidence that such a tax would raise a meaningful amount. Increased focus on tax avoidance and evasion would be more effective at swelling the Treasury’s coffers.
But there are other ways of targeting the most affluent. There have long been concerns over land ownership, with swathes of Scotland and indeed the UK controlled by a small, select group of landlords.
An empty property tax or a new tax on property over a certain value could be among the alternatives considered. Increasing the Annual Tax on Enveloped Dwellings, to hit those that have benefited from the property boom, could also boost the UK Exchequer without impacting too adversely on owners.
Pensions relief could be at stake, but this would not only go against Conservative policy, it could also be counter-productive. People are encouraged to pay into pensions so that they are not reliant on the state. However, in a tight spot, the Chancellor may decide it is time to grasp the nettle on this issue not only to raise revenues but also to address perceptions that the current system is unfair.
Much more likely is that we will see a range of incentives encouraging people to spend their money, similar to the Eat Out to Help Out scheme introduced last year. Getting people back to work, back to school and spending money in bars, restaurants and shops would provide our businesses with the boost that they sorely need. The VAT reduction for tourism and hospitality is likely to be extended for the remainder of the year.
I also think we will see strong moves to foster and develop innovation in science and technology. The UK has played a leading role in the Covid vaccine race with Oxford’s AstraZeneca being among the success stories.
Research and development reliefs would be a way to support vaccine delivery while creating and retaining jobs, such as those in Livingston where the Valneva vaccine is being produced after receiving funding to develop and manufacture the product in the UK.
Green energy is another field where Britain could lead globally. With Boris Johnson stating that he wants the UK to be the Saudi Arabia of renewable energy, new green incentives could have an important role in encouraging the right corporate behaviours and supporting the country’s green strategy.
Ironically, at the same time as moves aimed at tackling climate change, we could also see support for the airline industry. With Virgin Atlantic and BA already shedding thousands of jobs, the government may look to shore up the airlines.
A permanent slump in visitors to the UK would have far-reaching consequences across a wide number of sectors – take Airbnbs, for instance. If they came back into the property market because they couldn’t be rented, it would cause a crisis that could lead to another disaster for the banks.
Undoubtedly, there are some very difficult choices to make. Let’s hope Rishi Sunak doesn’t take a tumble when he mounts the tightrope, because when it comes to balancing the nation’s finances there is no safety net.
Susie Walker, head of tax at Johnston Carmichael