- When is the Budget?
- Coronavirus Budget 2.0: What to expect
- How will the Budget address record public debt?
- Will the Budget increase taxes? (income tax, corporation tax, VAT, CGT, pensions)
- How will the government address unemployment: will furlough be extended?
- What does the Budget mean for retail and hospitality?
- What does the Budget mean for the housing market?
- Will the Budget increase investment into infrastructure?
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When is the Budget?
The Budget will be delivered by the chancellor Rishi Sunak on Wednesday March 3. He will address the House of Commons at around 1230 GMT.
Coronavirus Budget 2.0: What to expect from the Budget
The Budget is when the government introduces new policies related to taxation and spending. It also reflects on the current state of the economy and forecasts are published to show how it will perform in the coming years in light of any changes that are made.
While every Budget comes with its own unique tests, this one is arguably one of the most challenging of all time. The economy has been hammered and debt is piling up as the government has had to prop up businesses unable to trade during the pandemic, and then there is the challenge of forging a new financial future for the country following Brexit.
The last time the chancellor outlined his vision for the country’s finances was back in March 2020, when he had to respond to the nation being plunged into lockdown with what was dubbed the Coronavirus Budget. With the autumn Budget having been cancelled, this one can be regarded as Coronavirus Budget 2.0, where the government outlines the next step of its plan.
The Budget will be aligned with the roadmap out of lockdown announced by prime minister Boris Johnson last month that aims to ease restrictions across the country in four steps, culminating in almost all lockdown rules being removed on June 21. The chancellor’s job is to make sure the economy is fighting fit when it is allowed to reopen and to provide the kickstart it needs after months of being locked down.
The primary challenge for the chancellor is to strike the right balance between providing further, albeit expensive, support to people and businesses in the remaining months of lockdown to keep the ship steady until lockdown ends, against the growing need to address the burgeoning debt pile that will have to be repaid one day.
Sunak has said the Budget will be one that ‘provides support to people’ but that he also wants to ‘level with people’ about the impact the pandemic has had on the public purse and how the government intends to address it.
UK government debt: How will it be repaid?
The UK’s debt pile has soared to an all-time high of over £2.1 trillion as a result of increased borrowing during the pandemic. Supporting the economy has seen the government borrow over £270 billion so far in the current financial year, up from less than £50 billion the year before, and the Office for Budget Responsibility forecasts that could climb to as high as £385.5 billion by the time the year ends on March 31.
The chancellor has suggested he wants to outline how the government will repay this debt, but this does not mean he needs to take immediate action. People and businesses still need time to recover from the toll of the pandemic and announcing measures but holding off on implementing them would provide time to prepare.
Plus, with interest rates at record lows and possibly heading toward negative territory, the cost of servicing all this debt is inexpensive, and some argue this is the perfect time to borrow more money to invest in the recovery. If the government pulls existing support too early and fails to guide the economy back to health, then the recovery could falter.
However, not addressing the debt pile now could be seen as kicking the can down the road. There is an argument that debt should be paid down now to avoid the risk of being deep in the red when the environment isn’t so favourable. The government will not want this level of debt if interest rates rise.
Will taxes go up in the UK?
The problem for the chancellor is that he needs to bring in more income if he wants to make a serious dent to the debt pile, but introducing new costs for people and businesses at a time when they are trying to financially recover is counterproductive.
He has the added problem that the Conservatives pledged not to raise income tax, national insurance or VAT during their successful election campaign in 2019, potentially tying the chancellor’s hands and preventing him from toying with the three single biggest sources of income.
The government is keen to stick to that pledge, but it can’t be ruled out that it is broken considering it was made before the pandemic erupted and the exceptional circumstances that the country now finds itself in. Former Conservative chancellor Ken Clarke has suggested Sunak considers raising all three taxes to help pay down debt.
Tax rises can therefore not be ruled out, but they are likely to come into a force at a much later date, possibly in April 2022.
Will income tax thresholds be frozen?
Sunak could get creative in order to maintain his party’s campaign promises. One of the more likely ideas reported to be in consideration is freezing income tax thresholds. Currently, people start paying a 20% rate after earning £12,500 and 40% when they earn over £50,000. By freezing those thresholds, more people would pay more tax as wages increased, although this would depend on a stable job market with rising pay.
Will corporation tax go up?
Corporation tax paid by businesses could also rise over the coming years, with reports suggesting it will gradually increase from 19% today to as high as 25% by 2024. If that does happen, then the first increase is likely to be delayed to give businesses a chance to bounce back before facing higher taxes.
Sunak is also likely to try to address the imbalanced impact the pandemic has had on some businesses over others. Whilst most businesses have struggled, some have thrived. The chancellor could ask for more money from those that have done well during the pandemic to help support those that have not been as lucky. Reports suggest this could be achieved in several ways, such as a one-off tax applied to those that have made excessive profits. The new Digital Service Tax on internet-based businesses could also be adjusted.
Will VAT rise?
The chancellor could look to tweak VAT for certain products and services as a way of increasing income without adjusting the standard rate. For example, this could see higher VAT applied to un-environmentally friendly products and services.
Will Capital Gains Tax increase?
One area potentially ripe for the taking is Capital Gains Tax. Reforming the tax has been in the pipeline for some time. Currently, people pay less tax on their capital gains such as when they profit from selling a property, company or shares than they do on their income, and there is a growing chance that these two will be aligned by raising Capital Gains Tax.
This may encourage more traders to consider moving from trading CFDs, which is subject to Capital Gains Tax, to spread betting, which is not.
Will the lifetime pensions allowance be frozen?
Last on the potential moves on tax could be a £1 million cap on the pensions lifetime allowance. Currently, people can save as much as they want in their pension but a cap would mean they would need to pay tax if it is exceeded, potentially encouraging people to spend more and save less.
UK unemployment rate: How will the government help the jobless?
Sunak said over the weekend that around 750,000 people have lost their job during the pandemic and that he wants to ‘make sure we provide those people with hope and opportunity’.
Unemployment sits at its highest level in five years at 5.1%, but this is still relatively low compared to the likes of the financial crisis because the government’s furlough scheme has encouraged companies to keep employees on the books even if they can’t work right now because of lockdown. Currently, the furlough scheme is due to expire at the end of March.
Will furlough be extended?
Ending furlough now would undoubtedly lead to a sharp rise in unemployment, especially as financially-broken businesses nervously await to find out when they can reopen. It is therefore highly likely that furlough will be extended, but the question is for how long. It is likely to be a short extension, possibly until the end of June when the government hopes all restrictions will have been lifted, and then reviewing the situation again.
The government may also extend the £20 uplift in weekly universal credit payments that are due to end on March 31.
What does the Budget mean for retail and hospitality?
Pubs, restaurants, gyms, leisure centres, beauty parlours, barbers, and the rest of the High Street have been among the worst hit as they have been forced to close during lockdown. These establishments are also among the most reliant on the furlough scheme.
One policy we do know for certain before the Budget is that these types of businesses, around 700,000 of them, will be eligible to receive a slice of a new £5 billion ‘restart grants’ aimed at getting them ready to reopen, with outdoor hospitality venues and non-essential retailers hoping to open as early as April 12.
Will business rates and VAT relief be extended?
Retail, hospitality and leisure industries have already been given relief that has meant they have not needed to pay business rates during the pandemic, taking care of one of the biggest cost burdens for business, while their VAT has been cut to 5% from 20%. Both of these could be extended until they are operating as usual again, potentially funded by any additional taxes introduced on more resilient parts of the economy. Some businesses that have managed to stay open during lockdown have returned any subsidies received from the government, such as supermarkets, which should help fund any extension.
Will Eat Out to Help Out be reintroduced?
The Eat Out to Help Out scheme could make a comeback to help give restaurants a pub a boost once they reopen. However, there is an argument that the industry won’t need any help finding customers considering how long people have been stuck at home. There have also been reports that alcohol prices could be cut in the Budget.
How will the Budget impact the housing market?
The housing market has remained resilient during the pandemic because it has been buoyed by the stamp duty holiday. This exempted people from the tax on purchases below £500,000 – applying to the vast majority of transactions – compared to £125,000 before.
This is due to come to an end on March 31 but could be extended to prevent a slowdown. However, some reports suggest the chancellor will only extend it for deals already agreed to prevent them from collapsing because of the upcoming deadline, which would mean the measure wouldn’t stimulate any new purchases.
Banks have understandably tightened their lending criteria during the pandemic and one area this has become evident is in the mortgage market. The Budget is expected to include new support for home buyers struggling to save for a deposit with a new scheme that would allow more people to buy with a 5% deposit, potentially bringing many new potential buyers into the market.
Will there be increased investment in infrastructure?
Expect a return of the phrase ‘levelling up’ in the Budget, referring to the government’s promise to boost investment up north and elsewhere to bring spending in-line with the amounts spent in London and the wider south.
Reports suggest this will be underpinned by a new UK Infrastructure Bank being established in the north of England tasked as providing investment in the likes of renewable energy, transport and regenerating town centres. The bank is expected to have £12 billion to play with and a further £10 billion in government-backed guarantees.
While the pandemic has hit finances hard, the government is keen to use it as an opportunity to ‘build back better’ and use government-backed projects as a way of boosting jobs, supporting the wider economy and accelerating the transition to a more environmentally-friendly world.
Separately, the government is expected to start investing in more businesses using public money to help provide the funds needed for fast-growing tech companies to mature and attracting further investment from the private sector.
Will the UK launch its first green bond?
The Budget could see the UK launch its first ever green savings bonds as a way of funnelling investment into new green projects, helping it demonstrate its commitment to achieving its net-zero targets ahead of holding the COP26 international climate summit later this year.