What does the March budget hold in store?
Tax or spend? That’s the question facing the chancellor Rishi Sunak in his spring budget on 3 March. Given the pandemic is still raging, and the nation remains in lockdown, it seems likely he will keep his foot on the accelerator of public spending for the time being.
But that just means the tax brakes are going to have to come on harder when the pandemic is in the rear-view mirror, to restore order to the treasury’s finances.
The Government can borrow at such low rates right now that it makes sense to open up the purse strings, and go for broke
on generating economic growth. But at some point the taxpayer will need to pick up the bill.
The Institute for Fiscal Studies reckons that £60 billion of
tax rises would be a plausible figure to expect in the medium term in order for the books to be balanced. Below is a summary
of some of the key points for savers and investors to keep an eye on in the forthcoming budget, and beyond.
STAMP DUTY HOLIDAY
The stamp duty holiday is due to end on 31 March, and again there have been calls to extend this exemption. These seem pretty hard to justify. The stamp duty holiday is not particularly well targeted in terms of helping people onto the housing ladder who might be struggling to afford the move.
In fact, by stimulating demand and pumping up prices, it’s arguably making the prospect of property ownership more remote for many people. Rather than extending what was devised as an emergency measure, it would be more sensible to conduct a root and branch review of stamp duty.
However, Government appetite for such a review is probably limited at the moment, given it has other more pressing priorities, and the stamp duty system has been the subject of a series of reforms since 2014, so it’s not like it’s flown under the radar.
What’s more the Government won’t simply want to give up the £8 billion it receives each year from taxing residential property transactions.
There have been some calls to replace stamp duty with an annual property levy alongside council tax, but such proposals sound like a guaranteed way to raise a chorus of boos and hisses from homeowners up and down the land.
CAPITAL GAINS TAX
The chancellor asked the Office for Tax Simplification to review capital gains tax (CGT) last year. The OTS duly obliged and recommended that CGT rates be raised in line with income tax rates, and that the annual £12,300 annual allowance of CGT free gains be cut to £2,000 to £4,000. For a treasury that is looking to pinch some pennies, CGT looks like low hanging fruit.
If the chancellor is minded to raise CGT, it’s just possible we may get some movement in the March budget. The government would want to give notice that any change to CGT is coming, to avoid a fire
sale of assets, and Rishi Sunak could use the budget to signal rate rises in future. That could stamp some thrifty credentials on a budget that risks being perceived as profligate.
HIGHER RATE TAX RELIEF ON PENSIONS
No budget is complete nowadays without some speculation that higher rate tax relief on pensions might be axed. Such a move would be progressive, and would raise money for the exchequer. But it would be fiendishly difficult to implement, requiring replumbing for huge parts of the pension system.
Raiding pensions is politically toxic at any time, but one group of people who would be particularly badly hit by cutting higher rate relief would be doctors, the very people who have been on the front line in the battle with Covid. Trying to cut pension tax relief right now could make Theresa May’s ‘dementia tax’ look like a long-lived and successful government policy.
GREEN TAXES AND SPENDING
Environmental measures are likely to feature heavily in government fiscal policy, particularly this year seeing as the government is hosting the UN Climate Change Conference in November. Unfreezing fuel duty looks like a nice green policy which also raises money for the exchequer.
There have been reports the Government is looking into some sort of ‘pay per mile’ tax for drivers, to protect treasury revenues as the shift to electric cars takes place. However, with the government also wanting to get the economy moving, right now doesn’t present the most timely entry point. It also seems unlikely the chancellor will want to add to the anguish of airlines and holidaymakers by increasing air passenger duty.
The Conservative election manifesto pledged no rises to income tax or national insurance, but the chancellor could choose to freeze allowances instead, when normally they would be expected to rise by at least inflation. Workers will then pay more tax as their earnings rise, but the tax-free allowances stay static. It’s fiscal drag on steroids.
The Resolution Foundation reckons that keeping the tax-free allowance at £12,500 would raise £5 billion a year by 2024/25, while keeping the higher rate threshold at £50,000 would
raise £1 billion a year. Those are pretty tempting sums for the chancellor to grab, without even technically raising taxes.
The Conservative chair of the Commons select committee has suggested a one-off wealth tax to help pay for the cost of the pandemic. The Covid crisis has exacerbated the gulf between rich and poor, and while some people have struggled to make ends meet, others have actually prospered financially as a result of lockdown.
A wealth tax would attempt to redress that balance. However the chancellor has reportedly dismissed the idea, and it doesn’t seem to chime with traditional conservative values. However these are unprecedented times, and there are some surveys which suggest many taxpayers are actually willing to put their hand in their pocket to help out.