The success of the Covid vaccine rollout means the future looks brighter. The Office for Budget Responsibility (OBR) believes the economy will get back to its pre-crisis size by next June. It expects the number of people who are unemployed to rise by 500,000 in the months ahead, but that’s much less than it was forecasting in November. Chancellor Rishi Sunak is extending emergency support to businesses and households for as long as lockdown lasts.He’s then offering a huge, temporary “super-deduction” tax break to businesses to encourage them to invest.But as soon as the recovery is secured the repair job begins.The government is borrowing at levels last seen during the First and Second World Wars.The chancellor hopes to balance the books on the back of pretty hefty tax rises.
Joel Hills on how Rishi Sunak's Budget will impact businesses
Corporation tax rises dramatically in two years time; income tax thresholds are being frozen - pulling an additional 1.3 million people into the tax system, creating an extra one million high-rate taxpayer payers over the next four years.Government spending is also being cut by £4 billion a year.“Based on the tax measures set out today, [the chancellor] has balanced the current Budget.
"He has balanced day-to-day spending versus revenues,” says Richard Hughes, head of the OBR.“If he can deliver on these tax plans and keep control of public spending he will have achieved the fiscal principles he set out in his Budget today ”But there’s plenty that could go wrong.
The recovery may falter. The vaccine programme offers reasons to be hopeful, but what happens next is highly uncertain. It will depend on the path of the virus, the speed with which restrictions lift and how households and businesses react when they do. The chancellor may find he has to spend much more going forward than he plans to.
Rishi Sunak hasn’t made a provision for any virus-related costs beyond March next year. That’s brave. There is a long-list of patients waiting for hospital treatments; pupils have missed months of classroom teaching; local authorities are financially up against it; railways may need taxpayer subsidies for some time to come.
The scale of our national debt also leaves us very exposed to interest rate rises.
The OBR calculates that an increase in interest rates of 1% adds £20 billion to the cost of servicing our debt.
That’s enough to wipe out all the tax revenues the chancellor hopes to get from his corporation tax rise.On the subject of corporation tax, the chancellor says it is a tax paid by large, successful companies.Think tank Tax Watch points out it is a tax largely paid by large, successful British companies.Multi-nationals, like Amazon, Facebook and Google, tend not to pay very much corporation tax.Rishi Sunak was already under pressure to reform the tax system, that pressure will only increase.