Rishi Sunak delivered a blockbuster Budget yesterday. Following the fiscal largess necessary over the previous 12 months, this is a Chancellor used to talking big numbers and he did not disappoint.
Presentationally, this was a smooth and assured delivery and from the perspective of political theatre, will have done no harm to his future leadership prospects. His political master’s eyes gazed nervously above his mask as the high performing protégé reveled in the occasion.
As far as the big picture is concerned, our view is that the Chancellor got the Budget balance spot-on. The UK economy has been battered by the policies needed to counter the pandemic and it needs further support and a little time for the wounds to heal. This was therefore a spend now, tax later budget.
Although the pain will be delayed, when the tax screw does begin to tighten, everyone is going to feel it. The UK tax burden will return to a level last seen over 50 years ago; a whopping 35% of GDP.
Unsurprisingly, our politicians have chosen to split the additional tax take between individuals and businesses on a 30/70 basis. No surprises here, bearing in mind that businesses don’t vote at elections.
Raising tax from individuals will be achieved primarily with the help of every chancellors’ best friend, fiscal lag. This is where the freezing of tax allowances and thresholds progressively drags more people firstly into tax and thereafter onwards to higher rates of it.
To be fair to Mr Sunak, he was very upfront about it. But he is smart enough to know that it is the perfect stealth tax because it is a slow progression and will not easily be noticed in operation because it will not cause pay packets to fall.
The increase in business tax is being delivered without much in the way of anaesthetic. There is a two-year hiatus, with a well-conceived incentive for businesses to invest; hopefully leading to higher levels of productivity and economic growth. However, this is to be followed by what can only be described as a mugging.
For big businesses, the corporation tax rate will increase from 19% to 25%. Whether or not you think it’s fair, the most important point is whether it is credible. Will big businesses really just roll over and accept a 31.5% increase in their corporation tax bill? Or will they be spending the next two years plotting with their tax advisers to relocate their profits to more favourable tax jurisdictions, as is already the case for so many international businesses? These days, you don’t need to travel as far as Panama to save tax. Dublin awaits with open arms.
I suspect that in reality, the Treasury realises this and that the proposed corporation tax increase will be watered down a little by the time we get there. So investors who are breathing a sigh of relief that the much flagged increase to capital gains tax rates did not materialise should not be too complacent. This is something that the Chancellor is sure to come back to in the years ahead.
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