Though his popularity has tumbled in the last year as he has faced the hard choices demanded by the economy, more people still think Rishi Sunak is doing a good job than think he is doing a bad job, according to YouGov’s monthly survey. But he is now facing multiple challenges as he prepares his Budget for next Wednesday 27th October.

The pandemic hasn’t gone away – in fact the UK’s daily case numbers are much higher than mainland Europe’s. Part of this reflects the more aggressive testing regime in the UK. Nonetheless, there is growing concern that if the spread of the pandemic in schools and amongst other young people spills over into the more vulnerable sections of the population, it will be hard to avoid measures that do further damage to the economy. Meanwhile, the shortage crisis is starting to spill over into inflation, and if rising prices and a tight labour market feed into wage inflation, it will be hard to avoid some form of economic austerity, either from interest rate rises or fiscal retrenchment. Past experience says that the authorities tend to leave counter inflationary action until too late and then jam on the brakes hard, using both fiscal and monetary means. Moreover, recent data on borrowing shows that with the economy not far short from pre pandemic levels of output and employment, the Chancellor still borrowed around 10% of GDP in the first half of the financial year.

So far, the Chancellor has been raising taxes. He announced a manifesto-breaking 1.25% increase in national insurance contributions a month ago. This was first touted as for funding social care and then to pay for the NHS. Who knows where the money will eventually go?  Last March, the Chancellor also announced a record £65 billion in tax rises, mainly through freezing income tax brackets and raising corporation tax. The problem with some of these tax rises is that with the UK in the bottom half of the tax competitiveness league for OECD countries, the actual revenue raised could be much less if business and taxpayers simply move away to more favourable jurisdictions.

Yet the Chancellor appears to be plotting to raise more taxes. While he has already frozen the capital gains tax allowance until 2026, there are suggestions that he might raise the rate closer to income tax rates or cut the tax-free allowance. Higher inheritance taxes are also rumoured.

There might be some sectoral tax reliefs for business, especially the retail sector, though it is unclear whether these will do much to offset the impact of a 6% rise in the National Living Wage from £8.91 an hour to £9.42 (for over 23-year-olds) and higher employers’ National Insurance.

Assuming that the announced rise in National Insurance that was meant to pay for better social care will in fact be diverted elsewhere, social care is still considered to be heavily underfunded (as Cebr reports for Hft and Irwin Mitchell  have shown).  The government is likely to be under pressure to increase grants to struggling households following the termination of the pandemic rise in Universal Credit. Additionally, other sectors are currently ramping up the pressure for more public spending.

If the Chancellor were brave (an adjective that is not normally used as a compliment in Whitehall) there are some routes out of his fiscal dilemma.

He could reform taxes. Currently the UK tax system manages to raise much less revenue than it could while being highly discriminatory, unfair, and doing considerable damage to economic growth. Perhaps the most extreme of the badly structured taxes is the stamp duty on property transactions that gums up the housing market and prevents old people from downsizing. Cebr studies have consistently shown that a lower rate of stamp duty would raise more revenue. There are many other taxes, like the sharp rise in the marginal rate of income tax to nearly two thirds when tax allowances are phased out, that almost certainly lose more revenue than they gain.

Second, he could reform public spending. To take just two examples, comparative studies such as the Armitt report have shown that HS2 will cost substantially more than any previous high speed rail system – about 6 times the French system for example. While the Public Accounts Committee has pointed out that the UK Track and Trace system has cost £37 billion, some estimates of the cost of the equivalent German system are as low as £48 million, just 0.14% of the UK cost. Even the government’s new body to investigate the causes of the UK’s low productivity is planned to cost over £30 million, about 10 times what it should. Public waste and inefficiency is not only damaging the economy but it leads to inequality as the funds that could be redistributed are frittered away into a spending black hole.

So, Rishi Sunak has a choice. He can either go for reform which will probably do some damage to his popularity, at least in the short term. Or he can muddle along, imposing tax rises that damage the economy and give him much less revenue than he hopes. Will he be brave?

For more information please contact: 

Douglas McWilliams   Email: dmcwilliams@cebr.com   Phone: 07710 083652Pushpin Singh Email:psingh@cebr.comPhone: 07736 641409