Budget 2021: Sunak set to struggle between rocks and hard places

Exactly how many rabbits does the chancellor need to pull out of his hat next week?

Rishi Sunak leaves Downing Street (Reuters)

It’s all very straightforward.

All Rishi Sunak needs to do when he stands up to deliver his Budget on 3 March is outline what his plan is to get the country’s finances back on track while we still grapple with the health crisis.

He needs to explain how he will continue to support business, how he will invest to help level up the north and build back better after this crisis, how he will raise more in taxes without choking consumer confidence and how he will manage all that with national debt of £2.11 trillion.

So what can he do, what’s he likely to do, and what are people demanding he do? Here’s a rundown.

Likely: An extension to furlough

The current Coronavirus Job Retention Scheme, better known as furlough, is due to come to a stop at the end of April. That’s caused some business groups and employers to warn that there could be many redundancies if there’s a hard end to support before the economy has recovered.

Rumours had already been swirling that the scheme would be extended, and on Monday the prime minister told parliament, “We will not pull the rug out,” promising that the chancellor will have more information about job support in the Budget.

Possible: A six-week stamp duty holiday extension

Last summer the government announced a stamp duty holiday to reignite the property market and it certainly did that. There was a rush of sales as people sought to use the break.

That rush means that the industry is choked up, with estate agents, conveyancers and other property professionals struggling to process all the purchases on their books before the deadline at the end of March.

So it’s suspected that Rishi Sunak might be considering a six-week extension to the scheme, to allow the bottleneck of sales to get through in time. The alternative risks sales falling through if people hadn’t budgeted for paying stamp duty.

However, this holiday was not universally welcomed and an extension might also be a mixed blessing. Critics say that the rush has meant the housing market is overheated. Prices actually rose 8.5% last year, according to the Office for National Statistics, which is the highest annual growth rate since 2014.

Possible: Something for the excluded

Few campaigns have been fought so tirelessly as the one by the people excluded from government support, perhaps because they changed jobs at the wrong time or because they fell through the cracks in the support available to the self-employed.

Jane Goodland, corporate affairs director at Quilter, says: “The income support scheme for the self-employed has arguably been the most contentious, purely because of the cliff-edge nature of its design. You’re either in or you’re out, and there’s nothing in between.

“It has been estimated that around 250,000 self-employed workers were excluded as they received over £50,000 a year in average trading profits. Similarly, around 150,000 people were excluded from the scheme as they were classified as ‘newly self-employed’.

“We could see the chancellor amend the scheme to include those who fall on the wrong side of these eligibility requirements.”

If he does update the scheme to bring more self-employed into it, campaigners will be watching to see if all the so-called excluded benefit. This is a debate that could get even noisier.

Possible: A rise in corporation tax

Even if the chancellor wants to raise taxes to begin the journey towards reducing government borrowing, that’s very politically charged and it may not be possible.

However, there have been rumours that he may declare an increase in corporation tax, perhaps because the UK has one of the lowest rates in the G7.

It’s unlikely any jump would be immediate, however.

Dhana Sabanathan, partner in private wealth, trusts & tax at Winckworth Sherwood, says: “The UK currently has the fourth lowest corporation tax rate in the OECD, and there has been considerable speculation about an increase of up to 24%.

“It is hard, however, to reconcile such a move with the UK government’s aim to increase international investment in light of Brexit and the pandemic.”

Likely: An extension to retail business rates relief

It does seem likely there will be an extension to business rates relief for retail, as the government advised local authorities to delay issuing bills for the next financial year. With non-essential retail not set to reopen until at least partway through April, that could be essential for many employers.

There’s also growing demand for a change in the tax situation to make it fairer for the high street as it competes with a rocketing online retail sector – perhaps through an online sales tax (see below).

Unlikely: An online sales tax

While it’s been a tough year for many people and companies, the pandemic was boom season for the big internet retailers.

Amazon sales in the UK grew by 51 per cent just in 2020 as people stayed at home and shopped online. That put pressure on high street retailers, and the government has been considering whether taxes could help create a fairer balance between online and bricks-and-mortar retail.

However, while there is an expectation that this kind of tax change might be in the chancellor’s mind, it’s not widely expected that any new measures will be announced any time soon.

It’s not impossible, though.

Possible: An extension to the £20 universal credit uplift

At the start of this crisis the government raised universal credit by £20 a week but that is due to end in April. There has been a lot of pressure on the chancellor to make the uplift permanent, as even with the extra money there’s evidence of real hardship among people who lost their jobs.

Recently ITV’s Robert Peston reported that it’s very likely the uplift will be extended, potentially until the autumn. However, this is arguably too important for rumours and speculation; people who rely on this extra money will be anxiously waiting to hear what Sunak says.

Likely: Tax changes that drive the green agenda

The government’s most urgent goal is clearly to get the country through what are hopefully the end stages of the Covid crisis. However, it also needs to show it’s taking steps towards the UK’s 2050 net zero pledge.

Jayne Harrold, environmental tax leader at PwC, thinks that means we are likely to see some tax changes designed to encourage greener behaviour from both consumers and companies.

“With the UK set to host Cop26 in November, the government will want to be seen as a leading light in the fight against climate change,” she says.

“There are multiple levers within the tax system that can be pulled to encourage businesses to become greener. These might include enhanced capital allowances for environmentally friendly equipment, longer decommissioning tax loss carry-back for renewable energy infrastructure, and enhanced R&D incentives to encourage innovation.”

Possible: A hike in fuel duty

That focus on pushing forward environmental issues could mean there is finally a rise in fuel duty, following a decade of freezes.

Harrold says a 5p increase would cost motorists as much as £100 a year but that would increase revenue and change behaviours.

“With an emphasis on greener transport, it would be a surprise if the government doesn’t extend the current initiative that sees drivers of company electric cars pay no benefit-in-kind tax until April 2021,” she adds.

Possible: changes to pension tax relief

It seems unlikely that the chancellor will feel able to break the triple tax lock promised in the party’s manifesto, meaning there should be no hikes in income tax, NI or VAT.

However, some commentators think it is possible that he might change tax relief on pensions. “For years, there has been speculation that different chancellors  might boost income tax receipts by cutting tax relief on pension contributions, particularly for higher and additional rate taxpayers,” says Steven Cameron, pensions director at Aegon.

“The latest rumour is that Rishi is considering a move to a flat rate of relief at 25 per cent. While this would reduce the incentives for higher rate taxpayers, it would actually improve the boost basic rate taxpayers receive.”

Of course, changes to pensions are unlikely to be immediate as savers would need time to adapt.

Anything is possible

No matter what the economic situation, chancellors do typically like to have a few surprises buried in the briefcase, even if that is just to try to take control of the headlines.

So it does seem likely there could be some unexpected announcements in the Budget, despite the financial constraints Sunak is working within.

Another pressure on the chancellor is the leader of the opposition Sir Keir Starmer, who recently spoke about the importance of rebuilding and resetting the economy after Covid.

His suggestions included a “British recovery bond” for savers to invest in Covid recovery schemes, an end to the public sector pay freeze, an extension to business rates relief and also VAT relief, and for the £20-a-week universal credit uplift to stay.

Whatever happens, this is going to be the most important Budget of our generation.

No pressure, Chancellor.