Latest views on whether we will have an interim budget
There is much speculation about when we will next see a budget or fiscal announcement from Government. The FT recently reported that measures may be announced as soon as next month, and that they will be the ‘the manifesto on steroids’. Presumably this means that existing stimulus measures will be enhanced. An interesting question, both economically and from a tax policy angle, is how the existing measures, and any further measures that the Chancellor may announce, will be paid for.
Let us not forget that the Conservative manifesto set out a pledge not to raise income tax, national insurance or VAT – that said, it seems to be increasingly common ground that given the utterly changed world we face, with a pandemic not yet gone, all bets can be considered off.
So what can we expect?
In the longer term, some tax rises are inevitable to pay for the massive cost of the state effectively becoming the employer of those who are furloughed, and general activity being reduced – by way of example April tax receipts were down almost £26bn compared to the same time last year, equating to a 42% reduction. More recently, we have seen a prediction from the OECD that the UK economy is likely to experience a fall of 11.5% of GDP, marginally worse than estimates for France and Italy, and separately the Bank of England warned that we are set to enter to worst recession for 300 years.
From a pure revenue raising perspective, increasing income tax rates would mean a very meaningful increase in tax receipts, with HMRC predicting that an 1% increase in the basic 20% rate would raise £4.7bn in the current tax year. However this is politically sensitive – and risks being viewed as targeting those who have worked tirelessly in the NHS and support roles throughout lockdown. An easier target would be the discrepancy between income tax and capital gains rates – given that additional rate taxpayers pay income tax at 45% but CGT at only 20%, it would come as no surprise to see capital gains rates increased.
It is possible, though, that a more immediate area of focus will be National Insurance, including potentially removing the NICs upper earnings limit, as well as aligning NICs for the employed and self-employed. The rules operate so that self-employed taxpayers earning more than £9,501 pay NICs at 9 per cent, whereas employees pay NICS at 12% on income up to £50,000 and thereafter at 2% above this. A change to align NICs for the self-employed and employed, as well as a flat 12% rate for all earnings, could be a focus. There is also a policy justification for increasing self-employed NICs rates given that a version of the furlough scheme has been in place for some self-employed taxpayers.
A further area of focus could be the much debated pensions tax relief for higher earners. With this having cost the Treasury £38bn in 2018/19 it might well be attractive – and again more politically palatable than other options.
Beyond this, it appears that the Treasury has approached certain private banks and wealth managers to discuss the concept of a wealth tax. While this has long been debated, and the fact that there are discussions does not mean anything will happen, one clearly cannot dismiss the possibility. There are many technical and theoretical questions as to how such a tax would work, and while one can look to other countries which have such measures, as they often have rather different tax systems this in itself doesn’t take one very far. In many ways the bigger issue though is whether this is a good idea at a time when the UK needs wealth creators to be encouraged to move to the UK and stay here and reinvigorate the economy. Wealth taxes in other countries are a frequent driver for emigration from those countries into the UK (and other countries that don’t impose annual taxes on net wealth). While this is a topic for another post, let us hope that at the very least a measured debate and proper consultation is engaged in before any such measures are seriously considered.
As we know however, raising taxes will do very little to encourage the much needed spending – all the more so given that while public-facing businesses will be reopening over the next few weeks, it is far from clear how keen people will be to e.g. go to bars, restaurants and non-essential shops in the short term.
One might therefore expect stimulus measures in the immediate short term and tax rises in the Autumn Budget. In terms of stimulus measures it would be no surprise if the Chancellor brought forward the rumoured £100bn spending commitments to boost activity. It is speculated that spending will focus on infrastructure, training and a plan to help British tech firms, but details are not yet known. Added to the fact that there is much call for reduction in e.g. business rate and even the suggestion of printing money to stimulate the economy, it may well be the any announcement in July will be focussed on stimulus with less attention on tax raising, and that this will be the focus of an Autumn Budget.
Notwithstanding all this uncertainty, it is clear that there are planning, governance and succession opportunities created by current low asset values, and it would be sensible to act now in advance of any tax rises.