Budget time looms.................

What should investors expect from the UK’s autumn budget?

Earlier this year, Rishi Sunak, the UK’s Chancellor of the Exchequer and emerging star, delivered his Spring Budget statement to a parliament concerned about the COVID-19 pandemic and its impact on the country. The UK, like the rest of the world, has had to overcome many difficult social and economic challenges brought about by the virus.

Therefore to preserve its status as a 21st century exporting superpower, it was imperative that Mr Sunak announce a series of measures to support public services and the economy during the outbreak. This he did with significant increases in government spending, as well as measures to ensure that the UK’s tax system was competitive and supported by a resilient regulatory regime that encourages business, innovation, and international investment.

With the next Budget expected to be delivered in the autumn this year, it is important that businesses and investors try to understand Mr Sunak’s past and present actions, as well as his future direction of travel. Not only does this provide reassurance that firm action is being taken by the government to get the economy back on track as quickly as possible, but with the right knowledge, careful planning, and astute insights, fortuitous decisions can be made. After all, this Budget will set the foundations for the Government’s economic agenda all the way up to the next General Election, which will likely take place in 2024 or 2025.

Getting the economy back to a "new normal"

It seems that Mr Sunak is keen to successfully reopen the UK’s economy safely, claiming the alternative is “not a sustainable situation”. This is especially important for UK Plc and investors, who are keen to ensure that the initial hard work around the first lockdown is not wasted, and any further outbreaks are minimised and contained. The Office for Budget Responsibility (OBR) for example has previously predicted that a three month lockdown, followed by a partial lifting of the lockdown for three months, would result in sharp bounce back in the economy, with GDP likely to jump 25% in the third quarter and a further 20% in the final three months of 2020.

To stimulate the conditions for further growth, the Chancellor has provided support for individuals and businesses through grants, loans and guarantees, as well as significant increases in public services spending. The Government is predicted to have borrowed around ￡300 billion in order to safeguard against greater economic and fiscal damage, as well as maintain the UK’s attractiveness for continued investment.

With the Budget being so critical to the UK’s recovery, there has naturally been much discussion about what it will cover. Difficult decisions will need to be made to keep the UK economy powered and growing. A major overhaul of business rates has already been confirmed and reducing unemployment and boosting consumer spending have been announced as clear priorities.

Forecasting Autumn

The big question is if the Chancellor will look to tackle the deficit immediately via taxation or choose to keep spending in order to further stimulate the economy. Revisiting the Cameron government’s “age of austerity”, which sought to curb "excessive government spending", is certainly seen as out of the question by media and business circles alike.

Taxation could raise billions in government revenue and there are a number of options for Mr Sunak to pursue. Already there are whispers that the ten-year fuel duty freeze may end, and prices subsequently raised by 2p in line with inflation. Increases in capital gains tax would be another option, in order to secure more revenue from high earners. There are also mutterings that corporation tax could also be raised to 24% from 19%, in order to bring it in line with the average of other G20 nations. This would raise billions but still allow the UK to retain its title as the best place to invest in the EU, given that this increase would still be lower than that of other European economies such as France, Germany, Italy and Spain.

Raising taxes would be an extremely unpopular move with voters, but especially so within the Chancellor’s own party, and the government itself. One cabinet minister was even quoted as saying it would be “like acid rain falling on green shoots of recovery” if the taxation path was pursued. This view is supported by leading think-tanks such as the Institute for Fiscal Studies (IFS) which has stated that the economy needs continued government support to recover before any tacking of the deficit.

With the world economy in flux, it is vital that the Chancellor continues to create the conditions for long term investment and growth. Admitting he is in between a rock and a hard place having to tackle the deficit but taxing the UK in the short-term now is a precarious situation. It is better to ensure that our nascent recovery is allowed to establish itself first before any fiscal tightening. That being said the deficit must be tackled but any plans to do so must be clear, road marked and brought in when it is appropriate.