Give and take – the UK funds

The UK budget is trying to overcome the economic damage caused by Covid-19 and, to a lesser extent, Brexit.

Like all budgets, it is a balancing act between give and take.

But this is unusually dependent on timing and sequencing.

There are three big things in this budget:

1- Additional expenses to support the economy through the Covid crisis for the next few months – totally to be expected

2- A boost to economic recovery in the form of a temporary tax break to get businesses to spend this year and next – the noticeable big new idea in this budget

3 – Tax increases to fill the gaps in government finances hit by the pandemic – well marked in advance to remove the sting.

Let’s start with the good news for UK taxpayers – no tax hikes yet.

UK Chancellor of the Exchequer (Treasury Secretary) Rishi Sunak says the economy is currently too weak and needs to recover.

The tax increases he has announced will therefore only take effect after a few years.

But taxes will go up, make no mistake.

In its analysis of the budget, the Office of Budgetary Responsibility (OBR), the UK equivalent of the Fiscal Council, says this budget will increase the tax burden from 34% of GDP to 35% of GDP over the next five years.

And at that level it will reach its highest level since the late 1960s, when Labor’s Roy Jenkins was Chancellor.

The main rise in the headlines is corporate tax – and this matters from an Irish perspective. It will rise from 19% to 25% in two years. This is exactly twice the Irish corporate tax rate, which is part of a series of policies in Ireland to encourage foreign direct investment.

For the past decade, the UK government’s policy has been to lower the corporate tax rate, a policy initiated by David Cameron’s Chancellor of the Exchequer, George Osborne – who expressed an admiration for the Irish business tax rate (as did Archbrexiter John Redwood in a newspaper article on Weekend against a tax hike).

Now this policy is reversed.

In fact, the OBR says the six point increase in corporate tax will account for half of the additional tax burden.

It will bring the UK back into the mainstream corporate tax rates of the advanced economy. #

Critics (including former Brexit Minister David Davies) say this will make the UK less attractive to foreign investment.

It has also unsettled some in Northern Ireland, including DUP Sammy Wilson MP who, in the budget debate, said the Republic of Ireland would be even more competitive with Northern Ireland on FDI.

The OBR says the corporate tax hike will bring in an additional £ 17 billion a year through 2025, bringing tCT revenue back as a percentage of GDP to the historically high levels of the 1989/90 Lawson boom.

They find that reaching a historically high proportion with a historically still low interest rate reflects the broadening of the base of the last decade, in which many tax deductions were canceled.

Then there is Stealth Tax, a tactic well used by the Irish Treasury Department to generate additional revenue by not indexing tax bands and allowances.

Mr. Sunak has announced a four-year income tax break freeze and a higher tax rate threshold.

This means that politicians can honestly say that we did not increase tax rates – but they will get more money into the treasury every year as expected inflation will raise wage levels over time.

The OBR says the move will add an additional 1.3 million people to the tax network and create 1 million new taxpayers with top tax rates by 2025. It should bring an additional £ 1.6bn in the first year to more than £ 8bn in 2025/26.

That’s almost £ 20 billion in additional income taxes and insurance due to the inflationary effect.

As for the pandemic, the government has been forced to borrow the highest peacetime loans in peacetime so it can spend money to keep the economy going in the hopes that much of it will still be around in the summer to be opened again.

The big numbers look scary – £ 355 billion last year – nearly 17% of GDP (Ireland’s bank bailout costs were 20% of GDP in 2010).

That is likely to fall to £ 234 billion this year – still 10.3% of GDP, a figure above the 2009/10 high for UK credit at the height of the financial crisis.

But unlike many finance ministers, this one did not cut investments to balance the books.

In fact, a year ago, Mr Sunak announced a huge increase in capital spending in his budget this time around, from 1.9% of GDP last year to 2.7% in 2025.

That’s a good thing – economies need consistent investment by governments to ensure that public infrastructure bottlenecks don’t slow growth.

But there will be cuts in ongoing spending – and that can hurt.

The estimate is for a £ 3 billion annual reduction in department spending.

Indeed, the opposition Labor Party has continued the attack, finding that the health budget will not be increased.

The OBR believes that ongoing health costs from the coronavirus could be higher than the government expected, which could mean spending cuts elsewhere or even more taxes being levied to pay for them.

However, the OBR anticipates the economy will recover rapidly – starting from a much lower than usual base, of course, but nonetheless should consider the combined effects of the unblocking brought about by the UK’s rapid vaccination program and the dissolution of high household savings The economy is growing by 4% this year.

Last year it fell 9.9% – the biggest drop in 300 years.

Even better growth is forecast for 2022 – growth of 7%.

This Chinese (or Irish) level of growth is short-lived, however, and will drop to a more normal 1.7% over the remaining three years of the forecast.

One of the things that Mr. Sunak hopes will add to the big boost this year and next is a budget measure to stimulate business investment.

It is a “super deduction” that enables companies to offset investments against their tax burden – at a super generous rate of 130%

Mr. Sunak gave an example of how it works in his household speech.

A company is spending £ 10 million on a new device.

Under current tax law, £ 2.6m of this is tax deductible. However, £ 13 million can be deducted from today’s budgetary action.

The catch? The tax break only lasts for the next two years.

This is a great incentive for companies to move forward with capital spending over the next two years.

The UK has suffered a very severe underinvestment over the past five years due to Brexit as companies have waited to see what impact Britain’s exit from the EU would do.

Now they know – and from today a huge fiscal carrot dangles in front of their faces, telling them to spend money, to spend money.

According to Sunak, this is the biggest corporate tax cut the UK has ever seen.

According to the OBR, the cut is £ 12 billion a year – 10 times more generous than the corresponding temporary capital injection in the 2009 budget designed to boost investment after the financial crisis.

In the next two years, the Chancellor will give something to the business with this major tax break and then resume business from 2023 with the corporation tax increase.

Again, the incentive is to invest in the short term for higher profits in the medium term (required to keep dividends stable when the government takes more).

Overall – in an analysis that reminds this reader of the kind of tax programs associated with Michael Noonan or the late Brian Lenihan – the OBR believes the tax hikes and spending cuts announced in the budget are as good as the deficit by 2025 should eliminate, while the National debt should stabilize and by then also fall.

However, it warns that even a small increase in government debt interest rates (30 basis points) would put the debt back on an upward path.

So the margins are fine (interest rates have already risen 30 points since the OBR finalized its forecast on February 5 and today), and the timing is subject to all the usual economic and political risks – and Covid 19 risk.