The rapid development of cases of Covid-19 in the UK, and the disruption that this is causing in the UK and globally, may prompt the Chancellor to act in the Budget to help businesses or take powers to do so. So, what might the Chancellor do?
First of all, it is tempting to look at the provisions that were put in place in the face of the global financial crisis. As surveyed then by EY, 2.3% of GDP was delivered as stimulus with on average 56% of that stimulus being delivered through tax changes. Those changes included:
- Improvements in the tax provisions for:
- Accelerated depreciation
- Loss carry forward and carry back
- R&D tax credit
- Indirect tax changes, including VAT rate reductions and cash flow relief (“time to pay” arrangements)
Covid-19 is arguably a different challenge and may prompt governments to focus more on immediate reliefs, on the basis in the medium term (and quicker than under the global financial crisis) demand and global supply chains will return to normal. This seems to be borne out by the changes that have been seen to date, including:
- Malaysia’s stimulus package focused on easing the cashflow of businesses, assisting affected individuals and encouraging demand for the domestic travel and tourism” sector.
- Singapore’s S$4bn stabilisation and support package, which included an 8% cash grant on the gross monthly wages of each local employee for three months, subject to a monthly wage cap of S$3,600 per employee.
- The Netherlands is giving permission to employers to reduce their staff’s working hours and apply for part-time unemployment benefit for them.
Repeating the past incentives?
Looking at the list with the UK’s position in mind, some of the changes used at the time of the global financial crisis have become standard government policy (such as the reductions in corporate tax rates and increases in R&D tax credits). Further changes here could be made, but might be difficult, particularly as the government is set to stop the two percentage point cut in corporation tax otherwise due to come into force on 1 April (due to raise £6bn). One option would of course be to let this go through, but as a short-term measure.
Others changes, such as time to pay provisions, and cuts in indirect taxes to stimulate spending remain as powerful today as they were then. They can act quickly and be removed easily, which may well be attractive to the Chancellor.
In contrast, the trend in policy since the financial crisis has been to reduce accelerated depreciation and to restrict the use of losses, and so releasing the constraints on these now could have an even greater impact that the changes might have had in the past.
What other options?
Beyond these previous changes, the Chancellor might be tempted by cuts in employers’ national insurance (the so-called “jobs tax”) or other rates changes. In contrast to the “time to pay” provisions, these represent real costs to the Exchequer, with each percentage point cut costing a further £6bn.
So, the Chancellor has plenty of options with the tax system to provide a short-term stimulus. These are likely to be costly but may be just what the country’s businesses need to be set for the challenges ahead.