Sunak Hints at U.K. Tax Rises and Vows to Maintain Covid Support

(Bloomberg) -- Chancellor of the Exchequer Rishi Sunak signaled he's prepared to raise taxes to fix the U.K.'s battered finances, while also vowing to maintain support for businesses and workers as long as the coronavirus pandemic lasts.

Sunak promised to be “honest” with the public in his budget statement on Wednesday. He said he'll outline a blueprint to address the budget deficit in a “fair” way -- government advisers project it to reach 19% of gross domestic product.

“We do have a challenge in our public finances and if we don't do anything, borrowing will continue to be at very high levels even after we've recovered from Covid; debt will continue to rise indefinitely,” Sunak said on Sunday in a Sky News interview. “That's not a good situation.”

The chancellor is grappling with how to rein in a record peacetime deficit without strangling the U.K.'s recovery from its worst recession in more than three centuries. But with the country mired in a third lockdown, he says his priority remains to protect jobs.

‘Whatever it Takes'

“A year ago, I said I would do whatever it takes to support the British people, families and businesses through this crisis,” he told the BBC. In the budget, “you will see us continuing to do that.”

In other developments:

• Sunak announced 1.65 billion pounds of funding for the U.K.'s Covid vaccination drive
• More than 20 million people in the U.K. have received at least one vaccine dose, with invitations to get vaccinated going out to over-60s this week
• The Treasury Committee released a report telling Sunak that it's not the time to raise tax, adding he has scope for “moderate” future rises in corporation tax
• 45 Conservative Members of Parliament in the party's Northern Research Group called on Sunak to slash business rates when a holiday from the levy ends
• Six cases of a Brazilian variant of the virus that officials worry may be more resistant to vaccines have been detected in the U.K. Authorities are trying to track down one of the positive cases after the individual concerned didn't fill in their test registration card

What Our Economists Say ...

“The recent rise in government bond yields and its implications for fiscal sustainability appear to have reinforced his view that a repair job should begin sooner rather than later. But there's a balance to be struck.”

--Dan Hanson, Bloomberg Economics. Click here to read the REACT.

With the U.K. vaccination program now reaching more than 20 million people, budget forecasts on Wednesday will show the economy recovering faster than previously expected, requiring fewer tax rises, the Financial Times reported on Monday, citing a person close to the budget process.

Prime Minister Boris Johnson has announced a four-step plan to ease pandemic restrictions that will mean some businesses have to wait until June 21 at the earliest to reopen. Sunak said he wants “to support people and businesses along that path.”

That means extensions are likely to the main measures propping up workers and companies, including a business rates holiday, reduced sales tax rates, and the chancellor's flagship furlough program which pays idled workers up to 80% of their wages. The Telegraph on Monday reported that the rates holiday and VAT cut may be extended beyond June 21 for pubs.

Tax Rises

But Sunak has also said it's his “sacred” duty to restore sustainability to the public finances, so that the country is ready for the next economic shock. With the budget deficit swelling toward 400 billion pounds this year, the Institute for Fiscal Studies estimates 60 billion pounds of tax rises may be required in coming years to balance the books, even as the economy recovers.

Officials have suggested U.S. plans to raise corporate taxes give the U.K. scope to do likewise, while still retaining the lowest rates in the Group of Seven major industrialized economies.

And the Sunday Times reported that Sunak plans to freeze the thresholds at which people start paying the basic and higher rates of income tax, pushing 1.6 million people into a higher bracket by 2024.

Sunak refused to comment on specific fiscal measures. But when asked whether now is the right time to raise corporation tax, he told the BBC that “now is the time to keep supporting the economy.” That suggests any tax increases he signals in Wednesday's budget aren't likely to take effect immediately. Another budget is due in the fall.

The ‘Sunak Effect'

Sunak's counterpart in the opposition Labour Party, Anneliese Dodds, is set to call him “economically illiterate” in a speech to Bloomberg on Monday, according to emailed excerpts of her speech.

Dodds will question Sunak's decision to freeze the pay of millions of public sector workers, and slam his potential plans to raise corporation tax. She'll also question the series of short-term extensions to his furlough program last year, accusing him of causing tens of thousands of redundancies by failing to provide longer-term certainty.

“That is the Sunak effect: while he dithers and delays, people right across the country lose their jobs,” she'll say. “Coronavirus may have closed large parts of our economy. But this Government crashed it.”

The U.K. has suffered one of the world's highest pandemic death tolls, at more than 122,000. It's also endured one of the biggest economic hits, with gross domestic product contracting 9.9% last year.

More to Come

Even so, polls for the Observer and Mail on Sunday both gave the Conservatives a 14-point lead when voters were asked which party would best handle the economy.

The chancellor has committed some 300 billion pounds to fighting coronavirus and supporting businesses and workers through this fiscal year to buttress the economy against the worst effects of three damaging lockdowns.

“We went big, we went early, and there's more to come,” Sunak said.

©2021 Bloomberg L.P.