UK promises billions more in stimulus. But are tax hikes coming soon?

UK finance minister Rishi Sunak is preparing to deliver a crucial budget in the wake of the economy’s worst slump in more than three centuries, the messy Brexit divorce from its largest trading partner and increasingly strained government finances.

Sunak will announce later on Wednesday that emergency support measures for workers and businesses are being extended, while making the case that public finances will need to be repaired once the country’s rapid vaccine rollout has eased the economic pain caused by the coronavirus pandemic.

The UK government has borrowed vast sums of money to fund nearly £300 billion ($419 billion) in fiscal stimulus over the past 12 months. Total government debt has soared to £2 trillion ($2.8 trillion), or close to 100% of GDP, a level not seen since the 1960s, according to the Office for National Statistics.

“We’re using the full measure of our fiscal firepower to protect the jobs and livelihoods of the British people,” Sunak will say, according to excerpts of his speech released by the Treasury. “Once we are on the way to recovery, we will need to begin fixing the public finances — and I want to be honest today about our plans to do that.”

UK GDP fell nearly 10% over the course of 2020, returning the economy close to the size it was in 2013. An ongoing nationwide lockdown imposed on January 5 is expected to hit the economy hard in the first quarter of 2021, while disruption to EU-UK trade following the Brexit transition period on December 31 is also weighing on activity.

While Sunak is not expected to announce immediate plans on Wednesday to rein in spending, tax hikes could be on the cards to fund additional stimulus measures costing billions of pounds, including a third extension to the government’s jobs support program and plans to keep enhanced welfare payments in place.

Sunak will pledge to keep subsidizing wages of workers on furlough until September, with businesses asked to contributing to costs starting in July, according to a statement from the Treasury. The pandemic has already wiped out more than 700,000 jobs and left roughly 4.7 million people relying on the state to pay the bulk of their salaries, government data shows.

Sunak, who took charge of the Treasury just weeks before the coronavirus crisis exploded in the United Kingdom last March, will also set out plans to channel £5 billion ($7 billion) in “restart grants” to over 600,000 companies in the hospitality industry, worth up to £18,000 ($25,000) each, he told broadcaster Sky on Sunday.

Pubs and restaurants will be allowed to reopen for outdoor service from April 12 under the government’s plan to gradually ease lockdown restrictions in the coming months, which have been helped by a successful vaccine rollout. The eventual restoration of international travel would also help boost the country’s huge service economy.

According to multiple media reports, Sunak could announce a hike to corporation tax to help restore government finances.

At 19%, Britain’s corporate tax rate is the lowest in the G7 and one of the lowest among OECD countries. Even if it were increased to 25%, companies in the United Kingdom would still face a lower tax rate than those in most other major economies.

But a major tightening in fiscal policy, mainly driven by higher taxes, could put the economic recovery on “shaky ground,” Capital Economics senior economist Ruth Gregory wrote in a research note last week.

“The risk is that over the next two years [Sunak] will be tempted to pull the rug out from under the feet of households and businesses by reducing the budget deficit at a faster pace than is currently scheduled,” Gregory said. “Not only would that undermine the economic recovery, but it could also cause more problems for the public finances than it solves,” she added.