London: Finance Minister Rishi Sunak has presented what he hopes will be the last big spending to pull the British economy out of the Covid-19 crisis, and announced a corporate tax hike from 2023 as he begins to focus on the big blow to the public finances.
Sunak said in his annual budget speech on Wednesday that the economy will return to the size it was before the outbreak of the epidemic in mid-2022, six months earlier than previous expectations, with the help of the fastest coronavirus vaccination program in Europe.
But he said permanent economic damage equivalent to 3% of annual output would continue, and that £ 65 billion of additional support was needed in the short term as restrictions lifted over the next few months.
Sunak’s early warning that he will demand more money from companies – and most individual taxpayers as well – makes him one of the first policymakers from rich countries to devise a plan to tighten budget policy after the pandemic.
Britain’s first corporate tax hike since 1974 will see large and profitable companies pay 25% from 2023 compared to 19% now, and the overall rate of tax in the economy rises to its highest level since 1969.
But before then, companies can use the two-year “super-deduction” tax credit that Sunak hopes will pull them out of the deep stalemate of the epidemic and invest in boosting growth in the short term.
The state budget watchdog said the move was likely to bring in investment that would have occurred at a later date.
In his address to Parliament, Sunak reiterated his plan to do “whatever it takes to support the British people and businesses” after the economy fell 10% last year.
Britain has also suffered the largest number of deaths in Europe due to Covid-19.
“Once we are on our way to recovery, we will need to start reforming the public finances – and I want to be honest today about our plans to do so,” he said.
Support measures included a five-month extension to Britain’s massive jobs bailout, broader aid for the self-employed, and a continued emergency increase in welfare payments.
The property tax exemption for retail, hospitality and entertainment businesses will now continue until the end of June, when Prime Minister Boris Johnson hopes to lift most Covid-19 restrictions.
The current tax credit has been extended for homebuyers for three months through June 30 and then for cheaper homes until the end of September.
Pubs are gaining and home builders, and bond prices are dropping
Homebuilding stocks gained in the news, with Persimmon being one of the top rallies in the FTSE 100, rising nearly 7%.
Premier Inn owners J.D. Wetherspoon and Whitbread also rose more than 5%, buoyed by an expanded value-added tax cut for the hospitality sector.
But British government bond prices fell sharply after Sonak said public borrowing would be much greater in the next fiscal year than he had thought just a few months ago – 234 billion pounds, or 10.3% of GDP, compared to a previous estimate of 164 billion pounds. Sterling Pound, or 7.4% of GDP.
The UK Debt Management Office said it intends to sell 296 billion pounds of government bonds next year, well above the 247 billion pounds projected in a Reuters poll.
“The UK’s financial position has become more flexible, more focused on investment, and more in line with its counterparts in the US and the Eurozone,” said Jacob Neale, an economist at Morgan Stanley.
This shift changes our perception of the United Kingdom. In the near term, we are seeing a stronger and more investment-focused recovery leading to a return to pre-Covid-19 production levels. “
To control borrowing, future SNAC hikes will increase the tax burden from 34% to 35% of GDP by mid-2020.
“So the UK will become the first major economy to consider such measures,” said Valentin Marinoff, head of foreign exchange research for the Group of Ten at Credit Agricole.
In addition to the Covid shock, many companies are also under pressure from Brexit after Britain left the European Union’s single market on January 1, and the government faces the challenge of massive investment to fulfill its promise to create a carbon-free economy by 2050.
The UK’s early driver of tax hikes
The UK’s Office of Budget Responsibility (OBR) said the economy is likely to grow 4% in 2021, down from the 5.5% it forecast in November, largely due to the current lockdown that began in January. Growth forecast for 2022 increased to 7.3% from 6.6%.
Sunak has already had Britain’s highest borrowing since World War II, with the deficit reaching an estimated 17% of GDP in the 2020/21 fiscal year ending in April.
Sunak said the corporate tax hike would still leave the main rate lower than in the rest of the G7 countries.
Ryan Newton Smith, chief economist at the Confederation of British Industry, said the increase was a “huge leap” and that the other G7 nations would be more competitive than Britain when tax breaks at state and federal levels are taken into account.
The Institute for Financial Studies said that after the tax increases, corporate tax revenue will be a greater share of GDP in Britain than in the United States, Germany, France or Italy.
Sunak also said it will freeze the amount of money people can earn tax-free and the upper rate threshold for income tax at the 2021/202 level through April 2026.