Sunak's 'balancing act' budget: Tax rises, spending, and boost for house buyers

  • Oops!
    Something went wrong.
    Please try again later.
Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·8 min read
  • Oops!
    Something went wrong.
    Please try again later.
UK chancellor Rishi Sunak will deliver his second budget on Wednesday 3 March. Photo: Yahoo Finance UK
UK chancellor Rishi Sunak will deliver his second budget on Wednesday 3 March. Photo: Yahoo Finance UK

Rishi Sunak aims to strike a delicate balance when he delivers his second budget as UK chancellor this Wednesday.

Sunak is set to announce new measures to protect the economy through what he will hope is the final few months of the COVID-19 pandemic. He will also announce investments aimed at kickstarting a recovery as restrictions begin to ease.

At the same time, the chancellor is tipped to raise some taxes to help address a government deficit that is on its way to £400bn ($559bn) this year.

Tax rises and COVID support spending are tipped to make up the vast majority of Wednesday's budget. The two areas have the potential to contradict each other and Sunak will have to ensure his policies are finely calibrated in order to avoid undercutting himself. Most economists have warned the chancellor against rising taxes for now.

READ MORE: UK second-home owners, stock investors, and pensioners could face £14bn tax hike

"There have been few budgets in the past where the balancing act faced by the chancellor of the day has been as tricky as that faced by Rishi Sunak next week," said George Buckley, chief UK and European economist at Nomura.

The chancellor must ensure his support schemes have the scale and duration to help viable businesses, while at the same time trying to limit costs as much as possible. Sunak wants to start repairing the UK's battered public finances as soon as possible. But he won't want any tax increases to derail the expected economic rebound later this year.

It makes for a finely poised budget. Here's what we're expecting from Wednesday's announcement, which is due around midday:

Tax rises for businesses and the rich

Much of the build up to the budget has been dominated by suggestions that tax rises are in the post.

Multiple reports suggest the chancellor will announce an increase in corporation tax, rising from the current rate of 19% to possibly as high as 25% in the coming years. Speculation has mounted that Sunak will also increase capital gains tax, bringing it in line with income tax. Capital gains changes would hit the wealthy, including those who own shares and second homes.

Sunak could announce a one-off windfall tax on businesses that have done well from the crisis, such as supermarkets or online retailers. The Sunday Telegraph reported that Sunak will announce a new tax on online deliveries. Reform of taxes for the self-employed will come later this year, the paper said.

WATCH: Why tax rises may be inevitable?

READ MORE: MPs tell UK chancellor ahead of budget: Don't raise taxes yet

Tax rises will be controversial. The Treasury Select Committee, the Labour party, and many leading economists have said now is not the right time to increase them. They believe the chancellor should wait until a recovery is underway.

Sunak has said he is keen to begin addressing the UK's £400bn budget deficit and £2tn national debt as soon as possible. Think tank IPPR said on Friday that increases to wealth taxes, capital gains tax, corporation tax, and land value tax would not derail any economic recovery.

A roadmap to rebuild: More cash for jobs and training

Wednesday's budget will mark a pivot point as the government begins to shift focus from protecting the UK's economy towards fostering a bounce back.

"We expect it to be a transition budget, with the government preparing the ground for more radical changes once the economy is on a stronger footing," Barclays economists said last week.

Sunak has promised to update his "Plan for Jobs" and on Friday announced a £126m investment in apprenticeships and traineeship schemes, hinting at the type of investment plans we will see in the budget.

READ MORE: Chancellor urged to spend another £100bn driving COVID recovery

"We expect the fiscal stimulus measures to be focused on policies to support job creation and business investment as Covid restrictions are released," economists at Goldman Sachs said.

Goldman forecast stimulus spending worth £60bn in the budget, suggesting plans could include tax breaks for business investment and more cash for the Kickstart job scheme.

"Our base case is that next week's Budget does what is needed to support the near-term UK outlook but nothing more," Sanjay Raja at Deutsche Bank said in a preview note. "We expect Sunak to talk up fiscal discipline while opting to shift some of the harder decisions around spending and borrowing until the Autumn budget."

Green bonds and tech investment

Part of Sunak's plans for a bounce back revolve around investment in innovative growth areas such as green energy and technology.

The Treasury has said Sunak will announce sovereign green savings bonds, which will allow retail investors to invest in green energy projects. The bonds will be issued by the government and funds will go towards renewable energy and clean transportation projects, among other things.

READ MORE: Britain to launch the world's first sovereign green savings bond

WATCH: How to access funds via the Green Home Grants scheme?

Sunak will announce a successor to the Future Fund, which was set up last year to help innovative startup survive the COVID-19 crisis. The Future Fund: Breakthrough scheme will take stakes in fast-growing tech businesses to help them "scale-up". The Treasury will allot £375m to the fund.

The government is also finalising plans for a "fast track" visa scheme for highly skilled workers looking to join UK tech startups. The chancellor will give more details of the scheme in the budget.

Billions will also be earmarked for the already announced UK Infrastructure Bank.

Support for the high street

High street businesses like shops, cafes, pubs and restaurants have been among the hardest hit by COVID-19 lockdowns. The chancellor will announce new grants to help these businesses reopen.

READ MORE: Britain readies new 'fast track' fintech visa for highly-skilled workers

Individual businesses will be able to claim up to £18,000 per firm to support reopening. The scheme will be worth £5bn in total.

An extension to business rates relief and a VAT freeze for leisure and hospitality are also likely.

Stamp Duty extension and support for first time buyers

The chancellor will reportedly extend the current Stamp Duty holiday — due to expire this month — until June. The policy has proved a hit with the public, spurring record mortgage lending activity and house price growth. The tax break has also provided a vital lifeline to the property sector by helping keep house builders, mortgage lenders, estate agents, and surveyors in work.

WATCH: How homebuyers can benefit from stamp duty cuts?

READ MORE: UK to spend £126m to create 40,000 new traineeships

Sunak will give first-time buyers a leg-up by announcing a new government guarantee scheme that will allow people to get larger mortgages with smaller deposits. First-time buyers or current homeowners will be able to secure a mortgage of up to £600,000 with a deposit of just 5%. The government will offer lenders the guarantee needed to provide mortgages that cover the other 95%, subject to the affordability checks.

New business support schemes as loan schemes scrapped

Business groups have been urging the government to extend COVID support schemes like furlough and state-backed loans ever since Boris Johnson announced his timetable for reopening the economy.

The roadmap for reopening was slower than some expected and means COVID-era support schemes will end before all businesses are allowed to reopen. Johnson promised the government would not "pull the rug out" from businesses when it came to support.

READ MORE: Rishi Sunak to launch £100m UK taskforce to target COVID fraudsters

The Financial Times reported on Friday that Sunak is set to extend furlough and other support measures such as business rates and VAT relief until June, in line with the reopening timetable. However, the chancellor will reportedly scrap his three state-backed loan schemes — CBILs, Bounce Back loans, and CLBILs — and replace them with a new programme.

WATCH: What is the Bounce Back loan scheme?

The FT reported that Sunak will announce a new, less generous loan scheme as he seeks to normalise business credit conditions. Businesses will be able to borrow up to £10m with a 80% state guarantee, according to the leak. Interest rates will be capped at 15% — far higher than the 2.5% cap on Bounce Back loans.

Separately, the chancellor will establish a new £100m fraud task force to catch scammers who target government support schemes. It comes amid concerns about the level of fraud within programmes like the Bounce Back loan scheme.

More COVID funding

While Sunak hopes to turn the page on the COVID-19 pandemic, the reality is the crisis is still not over. The past 12 months have shown that new risks and threats can emerge quickly and unpredictably.

Sunak will announce another £1.65bn in funding for the UK's vaccine rollout programme to ensure the whole nation can gain immunity. The chancellor will also announce a further £33m in vaccine testing and development, as well as £22m to test the effectiveness of different combinations of vaccine.

Little else

Between extension of COVID-19 support measures and stimulus investment, spending at the budget could total £100bn — double last year's budget. As a result, economists are not expecting much more when it comes to spending announcements. Areas such as education, defence, and the NHS, which have in the past dominated budgets, are not likely to see any major awards.

As ever though, there could be a "rabbit out of the hat" moment where Sunak surprises. The chancellor will deliver the budget in parliament around midday on Wednesday 3 March.

WATCH: What is a budget deficit and why does it matter?