Government's Covid black hole 'less bad than feared' due to vaccines

Covid black hole in public finances ‘is less bad than feared’ thanks to vaccine surge as poll finds Tory voters want Rishi Sunak to focus on spending cuts rather than tax rises and MPs threaten revolt

  • Chancellor Rishi Sunak will deliver his eagerly-awaited Budget on Wednesday
  • Claims the black hole in public finances from Covid could be smaller than feared
  • Poll for MailOnline found Tory voters want Mr Sunak to focus on spending cuts 
  • Chancellor looking to freeze the UK’s minimum income tax threshold at £12,500
  • Higher rate threshold could also freeze at £50,000 to bring in more revenues

Rishi Sunak could have more wriggle room than feared in his Budget this week amid claims the stunning vaccine rollout has upgraded growth prospects.

The Chancellor has been dropping heavy hints that he will raise taxes in his crucial financial package on Wednesday, stressing the need to fill the black hole left by the pandemic.

He is expected to keep pouring money into the response, extending the massive £50billion furlough scheme and other support for businesses until at least the end of June. 

However, Mr Sunak is also set to lay out a grim timetable of hikes to bring in more revenue and stop debt spiralling out of control. Corporation tax is almost certain to go up, while income tax thresholds could be frozen to drag more people into the higher bands. 

Tory MPs warning against such increases were given fresh ammunition this morning amid reports that the gap in the finances might not be as huge as previously feared. 

There have been estimates that there could be a permanent shortfall of around £40billion, with the Office for Budget responsibility having put the figure at £29billion in November before renewed lockdowns.

However, sources told the Financial Times that while the number had ‘fluctuated’ it was now likely to be smaller. 

‘The successful rollout of the vaccine is a material change in the last few months,’ one insider close to the Budget process said. 

Growth in 2021 could be the fastest for almost 50 years – although it is from a very low base after the worst downturn in 300 years – with GDP likely to recover to 2019 levels early next year. 

Meanwhile, a poll for MailOnline by Redfield & Wilton Strategies today underlined the political challenges for Mr Sunak as he puts the finishing touches to his plans.

It found Tory voters would prefer to see the burden taken by spending cuts rather than tax rises, by a margin of 44 per cent to 36 per cent. There was opposition to income tax rises in general, although there was backing for higher levies on corporations.    

A poll for MailOnline by Redfield & Wilton Strategies today underlined the political challenges for Rishi Sunak as he puts the finishing touches to his Budget plans

There was opposition among Tory voters to income tax rises in general, although there was backing for higher levies on corporations

The UK passed the landmark of 20million people given vaccine doses yesterday, far outpacing most other countries in the world.

The rollout has sparked confidence that lockdown will be able to ease soon, although Boris Johnson has rejected suggestions that his ‘roadmap’ timetable could be stepped up.

There are also concerns that a worrying Brazil variant could derail the reopening plan, after cases were detected in the UK for the first time. Experts say it cold sidestep immunity, making the current crop of vaccines less potent. 

In a round of interviews yesterday, the Chancellor all but confirmed that the £50billion furlough scheme and other Covid support measures will continue until the end of June.

The measures are likely to cost at least £15billion, and will be supplemented by other short-term support, including a £5billion fund for high streets.

But in a series of interviews, Mr Sunak indicated that this week’s Budget should be the last with major giveaways.

He is said to be already planning a second Budget in the autumn in the hope an economic recovery will allow him to set out a more detailed plan for tax rises to restore the battered public finances.

This could include increases to capital gains tax, hikes in national insurance for the self-employed and cuts to pension tax relief.

It is understood the Chancellor will also delay the publication of new ‘fiscal rules’ governing tax and spending until that point.

But Whitehall sources confirmed he will start the process of closing the huge black hole in the nation’s finances this week by freezing income tax thresholds for at least three years.

The move, which will raise £6billion and drag 1.6million people into higher tax bands, prompted an outcry from Tory MPs last night.

Mr Sunak is also set to raise corporation tax from 19 per cent to 20 – and set out a ‘pathway’ to increase it to 23 per cent.

The Chancellor said he had to ‘level with people’ about the scale of the economic challenge.

‘I think in the short-term what we need to do is protect the economy and keep supporting the economy through the roadmap, and over time what we need to do is make sure our public finances are sustainable,’ Mr Sunak said.

‘That isn’t going to happen overnight.’

A long-term deficit of more than £40billion would be equal to about 8p on the basic rate of income tax.

The crisis has also led to record borrowing of almost £400billion, pushing the national debt to £2.1trillion.

The Chancellor said an ‘honest and fair’ plan was needed and the huge borrowing had left the UK vulnerable to even a small rise in interest rates. 

Treasury sources said even a one-point rise could require an extra £25billion in interest payments.

Office for National Statistics numbers published this month showed state debt was above £2.1trillion in January

The Office for Budget Responsibility (OBR) has said it expects the public sector might borrow as much as £393.5 billion by the end of the financial year in March

The Office for National Statistics said last month that over the whole of 2020 the economy dived by 9.9 per cent – the worst annual performance since the Great Frost devastated Europe in 1709

Mr Sunak will make jobs a priority and is considering a National Insurance holiday for employers who take on new staff.

But in the short-term he made clear the costly package of economic support credited with propping up millions of jobs will continue.

‘We went big, we went early and there’s more to come and people should feel reassured by that,’ he said.

Tory MPs have stepped up pressure on the Chancellor to avoid any tax rises.

Former party leader Sir Iain Duncan Smith said that even freezing income tax thresholds would be a ‘mistake’ that would punish thousands of ordinary families.

Under the Treasury plan, the starting point for paying income tax would be frozen at £12,500, while the 40p rate would continue to start at £50,000.

 Government sources insisted that such a move would not break Boris Johnson’s ‘triple lock’ on tax, which pledged no increase in the headline rates of income tax, national insurance or VAT.

But Sir Iain said: ‘You will end up dragging more people like teachers and senior nurses into a 40p rate that was originally meant for the rich.’

In a letter to the Chancellor, 45 Tory MPs from the Northern Research Group called for business rates to be reduced from 50 per cent of market rents back down to 35 per cent. 

How Rishi Sunak is set to tackle government cash crisis 

Extending furlough

Likelihood: The £50billion job protection scheme is certain to be extended from its current end point on April 30. Extension likely to be until at least the end of June – and possibly September.

Raise corporation tax

Likelihood: Rishi Sunak will raise the tax on business from 19 per cent to 20, and set out a ‘pathway’ to raising it to 23 per cent. But an exemption for entrepreneurs is possible.

Increasing income tax

Likelihood: A manifesto pledge not to raise the headline rate will constrain the Chancellor. But he is expected to freeze income tax thresholds for three years, dragging 1.6million into higher rates.

Raising fuel duty

Likelihood: Sources say Boris Johnson has vetoed the Chancellor’s plan for an immediate 5p hike. But Mr Sunak could try to introduce a smaller rise – and will signal his intention to end the ten-year freeze at some point.

Taxing self-employed

Likelihood: Mr Sunak said last year that a bailout for self-employed workers raised questions about their preferential tax treatment. Treasury sources played down reports he was planning an immediate hike on their National Insurance contributions.

Longer stamp duty holiday

Likelihood: The Chancellor is expected to extend the tax break on purchases of homes worth less than £500,000 from the end of this month – probably until the end of June. Experts believe it could generate an extra 200,000 sales.

Tax on parcels

Likelihood: Ministers have already brought in a digital services tax on profits and are considering an online sales tax as part of a wider review of business rates. Sources played down reports of a new ‘green’ tax on online deliveries.

increasing capital gains tax

Likelihood: Officials have examined bringing the tax on property and assets in line with income tax rates. But sources played down the prospect of immediate action this week. Equalising capital gains tax would see rates rise from 20 per cent on assets and 28 per cent on property to 40 per cent for higher rate taxpayers.

A green deliveries levy on online retailers (pictured: Such as Amazon) is one route Mr Sunak could take, according to the Sunday Telegraph 

Source: Read Full Article