What does Mr Sunak have in store in next month’s budget?

11 mins. to read
What does Mr Sunak have in store in next month’s budget?
Master Investor Magazine

Master Investor Magazine Issue 59

Never miss an issue of Master Investor Magazine – sign-up now for free!

Read the latest Master Investor Magazine

Mr Johnson has seized control of the UK Treasury. Or has he? Mr Sunak will pronounce on 11 March that we cannot cut taxes and ramp up spending at the same time, says Victor Hill.

Cummings and goings

I was so sure that Mr Javid would remain in situ during Mr Johnson’s St. Valentine’s Day Massacre that I went around telling everybody. And it wasn’t just me who was blind-sided. That very morning I received an invitation from The Spectator inviting me to their evening post-mortem on the budget on 11 March – adorned by a photo of Mr Javid’s splendidly glistening pate…

When a couple breaks up it is inevitable that their friends ruminate on all that has happened in the recent past as evidence of the inevitable split. In my case, I was struck by the fact that Mr Johnson banned ministers from going to Davos – only to learn that Mr Javid had not only bowled up at the plutocrats’ ball, but also got into a spat with US Treasury Secretary Mnuchin on-stage about the pointless and doomed digital services tax (DST).

Now we all know that the Donald-Boris bromance has soured of late. This is largely on account of two issues: Huawei and the DST. Mr Trump had supposed that the pedigree spaniel, having been released from its European cage, would become especially affectionate: but instead, it promptly pooped on his shoes. That was why he slammed the phone down on his one-time friend (in so far as Mr Trump has friends) on 06 February.

(What a pity Mr Johnson didn’t appoint Mr Farage as UK ambassador to Washington earlier this month. Or even his energetic father, Stanley.)

Then, on 09 February, the Sunday Telegraph informed us that Mr Javid was cooking up an-ill tasting broth. It was alleged that, under the influence of his advisors and assisted by the innate perversity for which HM Treasury is famous, he was planning to introduce Milibandesque wealth taxes: a mansion tax and reduced relief on pension contributions for higher-rate taxpayers. This might have been leaked by Mr Javid’s own special advisors (spads) – or by his enemies within the Whitehall machine.

Not content with this (never denied by Mr Javid) the Chancellor histrionically came out in favour of HS2 a full two days before the Prime Minister was about to pronounce upon the matter before the House of Commons. Did he think the PM was faltering under the influence of his éminence grise, Mr Cummings? Possibly. Personally, I suspect that the final go-ahead for HS2 was very finely balanced – in fact it could have gone either way, since it annoys more Northern Tories than it delights. (It will be headache for the remainder of the Johnson premiership for reasons that I shall explain soon.)

We knew that Mr Cummings – who is, by the terms of the agreement made when Mr Johnson appointed him, Chief Spad – was suspicious of the team with which Mr Javid has surrounded himself. Indeed, he had one of them marched to the portals of Downing Street by armed police last year – much to Mr Javid’s chagrin. On Thursday last week the PM told Mr Javid that he could continue in post only if he sacrificed his team.

Mr Javid could have swallowed his pride. Given that all of his spads were put to the sword anyway, he chose to make a futile gesture and left the political stage – very probably for good. Thus he became the first Chancellor since Iain Macleod (who dropped dead in 1970) never to deliver a budget at all.

But the real issue is not about individual advisors; it is about the prevailing culture within HM Treasury which (in Mr Cummings’ view) is fundamentally dysfunctional. I have come across a few spads in my time and they are very largely inoffensive people: though some come across (you know the type) as overgrown adolescent know-alls who spend the entire day whispering conspiratorially into their mobile phones.

The real issue with HM Treasury is that it was on the wrong side of history. It was a nest of ardent Remainers post-referendum, who, in alliance with their confrères at the Bank of England, did their utmost to scare the living daylights out of the British people with a drip-drip of tendentious catastrophe-mongering during the entire length of the please-wake-me-up-this-can’t-be-real nightmare of poor Mrs May’s premiership.

Did the Treasury mandarins really think that they would get away with it once they were undone? If not: they are not strategists and should not be there at all.

Decisions, decisions…

Just a word about the (probably now defunct) new mansion tax and the issue of higher rate pension relief.

There is a respectable economic argument articulated not just by disciples of Thomas Piketty that, in a world of widening wealth disparity – the rich getting richer fast, and the not-rich getting better-off much more slowly – taxes should be imposed on wealth as well as income. Even economists who don’t agree with that proposition believe that the structure of property taxes in the UK is unfit for purpose.

Council tax is based on an assessment of home values carried out in 1993. The Treasury could revalue every property across the land tomorrow relatively easily using a website like Zoopla; but this could prove dangerously unpopular. Mr Blair’s government wanted to revalue in 2007 but copped out. Thus far, the politicians have chosen to leave this issue well alone. A recent poll by the TaxPayers’ Alliance suggests that Council tax is the most resented tax by the very voters who turned towards the Tories at the last election.

Stamp duty land tax (SDLT), is a one-off charge on the purchase of a property which rises to a massive 12 percent of the value of homes above £1.5 million. A reformed property tax could replace SDLT, making the revenues much less cyclical. SDLT dries up in an economic downturn – exactly when governments most need the revenue. And abolishing SDLT would unleash a wave of transactions which are on hold because of the putative cost.

The economist John Myers proposes to replace both of these taxes with an annual property levy on the value of a home (at least for the most expensive homes) which he suggests should be set at 0.5 percent per annum[i]. That would remove artificial disincentives and would provide the state with a more stable source of revenue.

Mr Javid’s people were probably thinking along these lines. Mr Myers thinks that, if Mr Johnson’s government does not grasp this particular nettle, then another one will.

Then there is the little matter of business rates which are slaughtering what is left of the high street. The retail sector employs approximately 3 million people in the UK. The industry accounts for just 5 percent of the British economy but pays about 10 percent of all business taxes and about 25 percent of business rates. The case for mansion tax type reforms extends to the high street too.

What about higher rate tax relief on pension contributions? When a lower rate tax payer chucks £1,000 into his or her pension pot HMRC grosses that up to £1,200. When a higher rate tax payer contributes £10,000 to his or her pension pot the government grosses that up to £14,000. Campaigners therefore claim that higher rate tax relief is regressive because the most well-off receive the lion’s share of the estimated £39 billion cost of this provision[ii].

Master Investor Magazine

Master Investor Magazine Issue 59

Never miss an issue of Master Investor Magazine – sign-up now for free!

Read the latest Master Investor Magazine

But, as Ryan Bourne has argued[iii], pension tax relief is not just an incentive to savers but a means of avoiding double taxation. Pension contributions are paid out of taxed income. And when the pension holder retires the pension income is taxed. Removing pension tax relief would disadvantage pension savings relative to those who build up a retirement fund in the form of an Investment Savings Account (ISA) wherein interest and capital gains go untaxed as well as withdrawals.

Critics point out that many higher rate tax payers will enjoy relief at the 40 percent level but that, when they come to retire, their pensions will be below the higher rate tax threshold (currently £50,000) and that they will only pay 20 percent on those (above the personal allowance, of course, currently at £12,500).

Mr Bourne counters that many people – especially professional self-employed people these days – have “volatile” incomes of perhaps £30k one year and £60k the next. Curbing pension tax relief at the higher rate would greatly disadvantage such volatile earners. Moreover, a flat rate pension tax relief system would incentivise employers to reduce salaries to below the £50k threshold in exchange for much higher employer pension contributions. Everything has consequences.

I suspect Mr Sunak is most likely to adopt the old adage: if it ain’t broke, don’t fix it.

Markets forgive the brave

When Mr Sunak’s appointment was announced the pound surged to above $1.30 and to €1.20. The explanation doing the rounds for this is that he represents higher, expansionist, Borisian government spending – and that that implies that the Bank of England is unlikely to cut rates this year, and might even increase them. (Plus the fact that the euro is beginning to look decidedly peaky – something I shall address soon.)

The question is, however, the extent to which Mr Sunak will be prepared to transgress Mr Javid’s fiscal rules. The most significant of these, inscribed in the Tory Party manifesto (not that that means much), is that the national debt will not be higher than the current level at the end of this parliament. But, frankly, that was always going to be a non-starter.

In my view, there has been a fundamental change of mood in the gilts market – and indeed in the global financial markets as a whole. The Cameron-Osborne pantomime horse inherited a fiscal deficit of 10 percent of GDP back in 2010 – and the markets were in a state of extreme perturbation. Mr Sunak inherits one of well under two percent of GDP and can borrow new money at a rate of 0.6 percent per annum. If the deficit were to rise to 2.5 percent, or even 3.0 percent, the markets would simply shrug their shoulders – so long as growth (forecast at a better-than-anaemic 1.1 percent of GDP this year) is positive.

That gives Mr Sunak some room to manoeuvre in the 11 March budget – though not perhaps as much as the PM would like. There will be some generous spending commitments; some personal tax cuts at the margin for lower-income earners; but, most importantly of all, the message will resound that Global Britain is open for business – and I predict a headline-grabbing cut in corporation tax.

For all that, there are systemic risks in play – as Mr Sunak understands. While global (especially US) equity markets are still euphoric, the bond, currency and commodity markets are telling a different story. Note the plunge of the Aussie dollar – a proverbial canary in the coal mine. This may be largely due to fear of a full-on coronavirus (Covid-19) pandemic. I’ll have more to say about that shortly. Forget black swans: it is Chinese ducks we should worry about.

How will it all pan out?

The Gods, in their infinite wisdom, have bestowed many blessings on Mr Sunak. He is highly intelligent, good-looking, well-connected and rich. He has also been liberated, thanks to Svengali Mr Cummings, of the Medusa-like embrace of the Treasury mandarins. (He was an out-Brexiteer during the referendum campaign, so that must be welcome to him.)

These attributes confer on him a remarkable opportunity as he takes office with unique power at an extraordinary moment in our economic history. His economic judgment is likely to prevail over that of a prime minister who, however brilliant, has only an impressionistic grasp of financial economics. He also knows that time is on his side. As Lady Bracknell might have said: to lose one Chancellor might seem like a misfortune; but to lose two would seem like a scandal.

It’s clear now that, come 01 January 2021, the Treasury will begin to receive huge inflows from tariffs imposed on German cars and (to a much lesser extent) French cheese et al. The trade deficit is likely to improve fundamentally under a hard Brexit – which will ease pressure on the fiscal deficit. The City is poised to expand internationally despite Brexit – and has broad shoulders. Wages are rising in real terms. Investment is pouring into the UK tech sector – all it requires is light-touch regulation (as opposed to being strangled by Brussels). The outlook for UK-based electric automotive and smart-farming is bright.

Politics is a tough old game and all long-term political predictions are trite. But Mr Sunak must – surely? – be the favourite to become Mr Johnson’s successor around the time of his 50th birthday on current odds.

Though there is a great deal that this nation must achieve under Mr Johnson before then.

[i] See: https://capx.co/a-fair-efficient-mansion-tax-is-possible-heres-how/?omhide=true&utm_source=CapX+briefing&utm_campaign=b7910d7934-EMAIL_CAMPAIGN_2017_07_17_COPY_02&utm_medium=email&utm_term=0_b5017135a0-b7910d7934-241824097

[ii] See: https://www.gov.uk/government/collections/tax-relief-statistics

[iii] Misguided curbs on pension tax relief should be shown the door, The Daily Telegraph, 14 February 2020.

Comments (3)

  • Marshal Ing says:

    Oh come on Victor ! Salary sacrificing your next £10,000 if you’re on £100,000 may cost you as little as £2440 ! that’s more than 75% rebated – if Corbyn had had his way it’d’ve gone to 85% ! UK Taxation is an unholy mess – and it must be deliberate – you should be highlighting the truth – if you’re a journalist worth your salt

  • Sohail Butt says:

    Victor I don’t believe this was a question of sajids ego or him swallowing his pride.What he said was that he would have been chancellor in name only, which is accurate. We will have to see what the actual policies are when the new chancellor announces them and then comment.
    One thing I learned from last year was that there were numerous commentators who were very wide of the mark in their speculations and discussions on what was unfolding. Things will be much clearer by January 2021 , I suspect that very few analysts will be able to predict what will unfold, although no doubt many words will be used.

  • Peter Gillingham says:

    Council Tax was a measure of the relative valve of property based on a guess of their valve on the 1st of April 1991, not 1993, lets see what the chancellor come up with on the 11th, could be the most radical budget for years.

Leave a Reply

Your email address will not be published. Required fields are marked *