The first official fiscal statement since the March budget is to be delivered next week as the chancellor attempts to keep businesses and households afloat in the wake of the coronavirus pandemic.
The virus’ economic impact has resulted in the UK’s debt-to-GDP ratio breaking the 100 per cent mark for the first time since 1963 and the economy shrank a record 20 per cent in April.
Rishi Sunak — who has pledged the announcement will be a ‘fiscal plan’ rather than an ‘emergency budget’ — will present his roadmap for the UK economy next Wednesday (July 8). Here’s what could be on the agenda:
There has been growing speculation that the chancellor could implement a levy on personal wealth to boost the UK’s finances and buffer the economy against the impact of the pandemic.
According to law firm Charles Russell Speechlys, HM Treasury has approached certain private banks and wealth managers to discuss the concept of a wealth tax.
Just yesterday (July 2) Gus O’Donnell, who served as cabinet secretary under David Cameron, Gordon Brown and Tony Blair, added his voice to calls to start taxing personal wealth, saying the Covid crisis had provided the basis for such measures.
Racheal Griffin, tax and financial planning expert at Quilter, said a one-off or ongoing levy on personal wealth could be put in place to “rebalance the wealth distribution and provide a significant boost to government revenue”.
But she warned: “A tax levied on the value of someone’s wealth is a worrying prospect given the practical and political difficulties associated with such a broad levy.
“What happens to those with considerable illiquid assets but few liquid assets? What happens to older generations who will need their wealth to pay for future social care costs?”
Cuts to VAT
It is possible the chancellor will look to encourage consumer spending by slashing the rate of VAT, commentators have predicted.
Last month Alistair Darling, who was chancellor at the height of the financial crisis of 2007 and 2008, called for an emergency VAT cut.
Jon Hickman, corporate tax partner at BDO, said cutting VAT would be the “simplest move” to boost spending, adding the tactic was used by Lord Darling in 2008 and had already been taken in other EU countries to help their economies post-lockdown.
Tom Selby, senior analyst at AJ Bell, agreed the chancellor could go “in the other direction” of the manifesto promise not to raise VAT and instead “cut VAT rates to stimulate spending”.
But Ms Griffin, said there were “two big question marks” around the effectiveness of a VAT cut.
She said: “The post-2008 reduction in VAT had a minimal impact on demand at a substantial cost to the exchequer. VAT is normally the government’s second biggest source of revenue...the Chancellor [might be] reluctant to put further strain on the public finances.”
Ms Griffin added the dynamics of the crisis also differed to 2008 as this time consumers had built up their savings and now faced a “psychological barrier” rather than a financial one, meaning there could be “pent-up” demand.