The latest economic update published on September 28 on the Commons Library Insight site confirms that while earlier in the summer there was a positive bounce-back across the UK economy, it cooled off pretty quickly.
This slowdown, coupled with the National Audit Office tracker showing an estimated lifetime cost of government spending at £370bn as a result of Covid-19, sets the economic backdrop for Rishi Sunak’s Budget speech and spending review.
There are several other issues that will also play an important role in Sunak’s review, including the impact of future spending and fiscal requirements post-Brexit, climate change and net-zero ambitions, and the funding of health and social care.
A review of proposals and progress to date
A year ago there was much debate by independent bodies about the imposition of a new wealth tax, but the acknowledged difficulty of introducing such a tax means this is not a likely route to solving the country’s fiscal issues. This leaves the option of solving of the funding deficit with existing taxes.
To some extent the NHS and social care funding issue has seen some movement with increases to national insurance contributions and dividend rates, to be introduced from April 2022 and then made permanent in April 2023 as an ongoing levy.
Back in March the chancellor decided on something of a wait-and-see approach with the Budget, while kickstarting the repair of fiscal shortfalls through a couple of key changes including the freezing of personal income tax, capital gains tax and inheritance tax bands and allowances. The chancellor also announced a rise in corporation tax rates from April 2023, when the environment for business is anticipated to be on a surer footing.
Sunak’s announcement that he would freeze allowances and leave tax rates unchanged was welcome news for savers, and the ongoing impact of inflation on wages will see tax inflows increasing – win-win.
Where does this leave the upcoming budget?
At the Conservative party conference, the chancellor made clear some priorities – "with national debt at almost 100% of GDP, public finances need fixing", and he was clear on technology, innovation and development being key to sparking economic recovery and growth, with an emphasis on helping the development of small and medium-sized businesses.
In addition, the Office of Tax Simplification, an independent body, has over the past two or three years analysed inheritance tax, capital gains tax and the alignment of the tax year to a calendar year or March 31. The last review of aligning the tax year concluded that while there may be benefits, it is fraught with difficulty and cost.
This leaves outstanding recommendations from the inheritance tax and capital gains tax reviews.
The OTS report commissioned by the chancellor in July 2020 made a number of recommendations, including aligning capital gains tax rates and income tax rates, effectively doubling capital gains tax rates – but this tax produces only a modest overall income. So, the doubling of rates may not be the only change.