The upcoming U.K. budget is expected to focus on continued support for people and businesses through the coronavirus pandemic, but should also support the recovery as restrictions are eased, the Institute for Fiscal Studies (IFS) has said.
Chancellor of the Exchequer Rishi Sunak’s budget on March 3 will need to strike a balance between “continuing support for jobs and businesses harmed by lockdowns, and weaning the economy off blanket support which will impede necessary economic adjustment,” IFS Director Paul Johnson said in a February 16 release.
Sunak needs to recognize and address “the multiple inequalities exacerbated by the crisis,” Johnson said. “Fiscal policy should lean against the effects of looser monetary policy, which has again benefited the older and wealthier at the expense of the younger and poorer. And he will need to allocate substantial sums to help the health, education, justice, and local government systems deal with ongoing consequences from the pandemic,” Johnson added.
Sunak is facing “huge economic uncertainties” as the economy adjusts to the challenges of Brexit, recovery from COVID-19, and the government’s commitment to move to net zero greenhouse gas emissions by 2050, Johnson said. “It is possible that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord. But that is not a central expectation: more likely we are on track for ongoing unsustainable deficits. . . . A reckoning in the form of big future tax rises is highly likely, but not as yet inevitable,” he said.
Measures to increase the productive capacity of the economy should include “removing disincentives to investment” from the tax system, the IFS said. Policy options to be implemented as part of broader reforms in the medium term could include changes to the tax base to improve investment incentives and increases in tax rates on business owners’ incomes “and/or an increase in the corporation tax rate,” according to the IFS.
Stamp duty land tax is “a particularly damaging tax,” the IFS argued. “Its abolition would stimulate the economy and could be introduced alongside a commitment to replace the forgone revenues with a reformed and revalued — and therefore fairer — and increased council tax,” it added.
The IFS said a cut to employers’ National Insurance contributions could boost job creation, while a subsequent increase in employee and self-employed contributions could raise revenue and reduce “the current tax penalty on standard forms of employment.” COVID-19 will “change the political economy” of tax reform, IFS researchers said in January. They argued that preferential tax rates for business owner-managers “cannot be justified by differences in social security benefits or employment rights and are poorly targeted at incentivizing entrepreneurship.”
Gaps in Support
In a third report on the economic impact of the coronavirus published on February 15, the House of Commons Treasury Committee said a “lack of analysis” provided by HM Treasury has given the impression that the government “is making important decisions without proper regard to all their impacts, both on health and the economy.” Treasury should be more transparent about the economic analysis it undertakes to inform government decisions, the committee said.
The committee also addressed the continuing gaps in the coronavirus support schemes. It urged Treasury to revisit the income limits in the self-employment income support scheme; use the data in tax returns for 2019-2020 to help the newly self-employed; and investigate ways to support limited company directors.
“By conspicuously leaving out a large proportion of limited company directors from support altogether, we are concerned that the government is sending out the wrong message — that it is not adequately supporting entrepreneurs and employers, who have suffered significantly from a lack of support,” the committee said.
The committee noted that business groups have backed a proposed directors' income support scheme, but it recognized that there are “administrative difficulties to overcome and fraud risks” regarding the implementation of any such scheme. The government’s assessment is that the scheme as proposed is “unworkable, because it is intrinsically reliant on self-certification by owner-managers of companies,” Permanent Secretary to the Treasury Tom Scholar said in a January 26 letter to committee Chair Mel Stride.
The coronavirus job retention scheme should be phased out as restrictions are eased, according to the IFS analysis, although “a much more tightly targeted version” may be needed for industries in which activity remains restricted for longer, such as in aviation.
Extension of the coronavirus job retention scheme would justify another tranche of grants under the self-employment income support scheme, and Sunak could provide support to the newly self-employed and those excluded so far because of income limits, the IFS added.