Rumours are growing that Rishi Sunak will present an emergency budget to the House of Commons early July 2020. Given the historic contraction in the UK economy such a measure wouldn’t be surprise. But what could the Chancellor announce? Peter Webb, our International Tax Manager, explores some of the options.
One thing has become clear through this crisis – there is no link between government spending and taxation. This is something we have always been aware of, but seeing the government spend hundreds of billions of pounds without raising taxes, and indeed against a backdrop of rapidly diminishing tax receipts, has hammered that lesson home.
Will taxes rise?
Raising taxes now will undoubtedly put the brakes on the economy, increase the financial impact of the pandemic and slow a recovery. Ultimately such action would not be prudent; it will simply cause further harm to the current financial picture.
Therefore, it’s unlikely that there are any tax rises on the cards just at the moment; they are unnecessary to fund government spending. However, in the longer term, a large government debt is undesirable and there are likely to be future tax increases to tackle that deficit. It seems UK taxpayers are accepting of this. According to a recent survey undertaken by pension provider A J Bell three out of four would be willing to pay more to tackle the effects of the pandemic.
Re-starting the economy
The contraction of the economy due to the pandemic has been sudden and severe. Rishi Sunak’s statement will no doubt focus on the urgent need to kickstart the economy. So what can he do to facilitate this? There are three obvious courses of action on the tax front:
- One of the biggest costs businesses face is National Insurance contributions; a cut in employer’s NI would be an easy way to help businesses.
- A temporary cut in the rate of VAT could be useful, to help encourage consumer spending and act as a boost to retail, one of the hardest hit sectors.
- The business rates holiday which currently applies to the retail leisure and hospitality sectors could be extended to other industries.
The International Monetary Fund is predicting an economic recovery in 2021. Whatever actions are announced Mr Sunak will be focused on ensuring that he does not put that recovery at risk. Although time will tell what an emergency budget will bring, the only real certainty is that there are tax changes on the way.