Rishi Sunak must take his time balancing the books or risk punishing those hardest hit by Covid
Timing is everything. The Chancellor, as he weighs up his options to make some initial headway in his avowed “sacred duty” to balance the books, knows this only too well. His income support schemes are being closely managed to match the extension and easing of pandemic restrictions on the economy.
While this is significant, so too are the numbers who have slipped through the cracks through no fault of their own. These companies should not be further penalised in the near term if as mooted this budget sees the beginning of new business taxation.
The UK has seen some of the heaviest cumulative restrictions on economic activity in the developed world, looking at the severity and time spent under lockdown as measured by Oxford’s Blavatnik School of Government. Its income support schemes are generous compared to the likes of the US, but notably less comprehensive than the rest of Europe.
Millions of businesses hit by restrictions, self-starters and scalers among them, have failed to qualify for either of the two main income support schemes due to arbitrary cutoff dates and how their companies are structured, often at the behest of clients for transparency purposes. Many of the smaller businesses who run limited companies for this reason also do not avail of PAYE, in order to pay themselves last as entrepreneurs often do. This, combined with director duties, means many cannot furlough themselves, all the while often paying more in combined tax than they would operating as self-employed.
So the idea that these firms should also pay the price of financial support they have not been able to access, in the form of any imminent hike to corporation tax or beyond, tests the notion of fairness to the extreme.
Economists and think thanks from left to right, as well as the Institute for Fiscal Studies, have acknowledged fiscal consolidation is needed in the medium to longer term, but argued now is the time to keep protecting jobs and growth. Over 80 per cent of Institute of Directors members believe this to the priority in the near term over reducing the UK deficit and debt levels.
If as floated, areas like corporation tax see an increase in this week’s budget, which limited companies pay even as SMEs but not the self-employed who have availed of their own income support scheme, there must be staggering and narrowing of its scope.
SMEs should be able to defer paying an increase for up to 12 months, which would likely tally with a more permanent end to certain restrictions. And those who have been unable to qualify for income support should benefit from a further exemption by continued option of deferral, rather than simply paying a lower rate in the shorter term. They will likely need longer and have further to go to recover.
The IoD believes income support protection schemes also need to be tapered and offset by more broadbased measures to stimulate growth and business activity as demand adjusts to a new normal while government intervention winds down. Accepting the need for fiscal consolidation should bring with it deferral relief for those at the smaller end without support to date, and temporary cuts to employers’ national insurance contributions to boost investment and retain jobs.
With infection rates falling and vaccination numbers speeding ahead, the Chancellor’s budget provides an opportune moment to create a roadmap for transforming the economy from life support to turbocharge mode. Tackling UK borrowing and debt levels may need to be part of the equation, but this should be timed and targeted appropriately. Going too fast and too sweepingly will undermine its broader function, to provide an off-ramp to support and reboot growth. Anything else risks undoing efforts made to level up to a fairer economy for all, particularly those bearing the biggest brunt of this pandemic and who will be key to getting it going again.