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When I was younger, we used to talk earnestly about a band’s ‘difficult’ second album. We all accepted that coming up with a brilliant first set was one thing but matching that initial burst of creativity with another was much harder.
Well March 3 will see the Chancellor Rishi Sunak deliver his difficult second Budget. It is the sequel to a highly regarded first effort when he was just weeks into the top job at the Treasury.
Although Sunak was praised for the boldness with which he tackled the financial challenges of the early weeks of the pandemic, he will know more than anyone that this was the easy bit. Deciding how and when to guide the country back to financial ‘normality’ is a bigger challenge.
The Chancellor is an instinctive Conservative, unlike his neighbour in Downing Street whom most people recognise is more of a people pleaser. Sunak recognised the need to spend big last year but he believes it is his duty to balance the books just as soon as he sensibly can.
This naturally raises alarm bells with anyone fortunate enough to either already own financial assets or to be accumulating them. Almost everyone, that is, who is reading this article.
So, what should we expect in just under two weeks’ time?
Probably fewer concrete measures than we fear. Quite possibly, however, more worrying hints of the future direction than we would prefer to hear.
In recent weeks it has become clearer that the Government is determined not to repeat the mistake of last year’s premature re-opening of the economy.
If this is really to be the final lockdown, then we are likely to proceed with great caution. The squeeze on the economy will last longer than natural libertarians would like. And that means that the Chancellor’s primary objective will continue for now to be supporting the economy rather than repairing the country’s finances.
At the margin this makes unwelcome tax raids a little less likely.
This does not mean, though, that in due course a grown-up conversation can be avoided about the kind of country we want to live in and what we can afford. That will mean an honest look at what the government spends our money on and how they should tax us to pay for it.
The conversation should start now but the conclusions can and should wait for another day. The country does not face a fiscal crisis despite this year’s record levels of borrowing. Low interest rates mean we can afford to borrow the money and the Chancellor is likely to recognise that in his comments on 3 March.
However, he is also likely to start the process of managing our expectations. I will therefore be looking out for hints, nudges, reviews and consultations. Here is my checklist:
1. Corporation tax. Former Chancellor George Osborne reduced the rate at which company profits are taxed from 28% to 19%. There were plans to go even lower to 17%, although these were scrapped. Even if the corporate tax rate were to rise to 23%, we would still be more lightly taxed in this area than the OECD average. Doing so would raise £14bn a year. Shareholders would obviously pick up the tab. Probability: medium.
2. Capital Gains Tax. Last year, the Chancellor ordered a review of CGT and the Office of Tax Simplification concluded that the current rules were ‘counter intuitive’ and created ‘odd incentives’. This is because CGT is taxed at a lower rate than income. Aligning CGT with income tax could raise a further £14bn a year. Depending on how any changes are implemented, a tightening of the CGT regime could hit: property owners; business owners; people sitting on uncrystallised capital gains. Probability: low in this Budget, high in due course.
3. Pensions tax relief. It would not be the run-up to a Budget if alarm bells were not being rung about the Government finally grasping the nettle of how pension contributions are privileged by the tax system. Chancellors have taken a look over this particular abyss before and stepped back. It would be particularly unpopular in Conservative heartlands. But the current system clearly benefits higher earners the most and the potential savings are significant. Probability: again, low in this Budget, medium to high in future.
4. One-off wealth tax. An upcoming report from the Treasury Select Committee is expected to include a proposal for a one-off wealth tax. A report from the Wealth Tax Commission last year said a one-off levy of 5% on assets in excess of £500,000 could raise a massive £260bn. The Chancellor is reported to be against the idea but if he were looking at a single measure that could put the UK’s finances back on track, a version of this might fit the bill. Probability: low - this feels too radical.
5. Personal tax allowances. This is probably the easiest target of all because freezing the levels at which individuals start to pay tax and mover into higher tax bands is a ‘stealth tax’. Like inflation, it is a way of dipping into people’s pockets without many of them noticing. The £6bn potential increase to Government revenues is not to be sniffed at either. Probability: high.
So, there is plenty to watch out for in a fortnight’s time. My gut feeling is that we will hear nothing concrete on the first four but the fifth is more likely. And if the Chancellor wants to make it into the studio for a third album, he knows he must please a fan base with diverse musical tastes. Good luck to him with that.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.