THE STREET ANALYSTS

Sunak’s new budget: Delaying the Inevitable

In the early days of the pandemic, it felt as though the Chancellor Rishi Sunak could do no wrong. His popularity was rising and calls for him to take Tory leadership once Boris’ reign ends were surprisingly high, for a man who as never been in conventional politics. I particularly remember his appearance of the Andrew Marr show, where he impressed with his clear strategy.

But it is important to remember that when you pay the wages of nearly 5 million Britons, you are likely to be a much-loved character, and his hard and fast strategies certainly look good in the face of the pandemic but could lead to some harsh side effects. This was the worry ahead of Sunak’s announcement on Wednesday, that the big spending would mean much higher taxes. The government prepared journalists for the worse in the weeks before hand, and the working man worried for a large rise in income tax.

However, the initial reaction has been mainly positive. Although taxes are going to rise, the main change was in corporation tax, which will rise from 19% to 25% by 2023, and a freeze on income tax, meaning that the tax burden will increase as incomes naturally rise. But the spending has continued. The Spike in cases around near year has hurt the economy more than was expected, but this means that the bounce back will be harder. Although expected growth for 2022 is lower, the forecast growth in 2023 would be the fastest in 80 years.

This means Sunak is happy to keep the economy rolling and tax heavily during 2023. The furlough scheme has been extended from its April ending to September, many grants have been extended and the lower levels of VAT for hospitality businesses has continued. But these are small in comparison to Sunak’s big change: ‘the super-deduction’, which will allow generous tax breaks to businesses who invest into their firm. Since the Brexit vote, investment has been low, as businesses worry about the future of their country and its economy. Sunak is trying to give them the confidence to spend big.

These businesses will have the cash piles to do so too. The importance of separating the pandemic from a regular recession is important, as people are far more likely to be sat on large cash piles, especially businesses, who haven’t had to pay the wages of their employees for months. Sunak hopes that this will be the gamechanger for the economy, with a shrinking output gap helping GDP reach its full potential.

Politically however, the timings seem off. Although the second wave and the new variants may have scuffed the Tory’s plans, delaying the tax increases until less than a year before the next general election, in 2024, seems like a misstep, especially after the media was told to expect big increases this time round, and there weren’t, when they are again told to expect the increases, they may instead expect another small hike, only to be slapped in the face with a rise in both corporation tax and income tax.

The Conservatives will have to be careful, with Labour making critiques about what was already a relatively left-wing budget from Sunak. Nothing puts off voters like tax raises do, and even the success of the vaccine rollout may be clouded by the budget. Sunak must learn that in politics, timing is everything.