UK Budget 2021: Will Rishi refuse to raise taxes?

Does Rishi Sunak either need or want to fix the public finances? As the budget approaches, there has been much speculation about which taxes he might increase, either now or in the immediate future. Property taxes, wealth taxes, capital gains, corporation tax and many other tempting increases have been mooted by commentators and politicians. And Rishi has done nothing to dampen speculation, noting in recent weeks that ‘we should look to return the public finances to a more sustainable footing’ after it emerged that public sector net borrowing from April to December 2020 reached £270.8 billion, £212.7 billion more than in the same period in 2019. Stern Treasury guardians of financial orthodoxy are presumed to have persuaded the Chancellor to follow in the footsteps of George Osborne, and become a champion of austerity.

But why would Mr Sunak even consider such a course? It would be economically and politically disastrous and he is surely both too canny and too ambitious to consider it. Politically, two audiences matter to Mr Sunak. The people of Britain, who are not in the mood for any kind of austerity. And 100,000 Conservative members, the people who will choose the next party leader, and are implacably hostile to higher taxes, particularly anything that targets wealth or property. At the moment, YouGov suggests his popularity rating in the country is around 44 per cent: good, although below Boris. The January Conservative Home poll of Conservative members found him as the second most popular member of the cabinet (after Liz Truss), with a satisfaction rating of over 80 per cent. He is in an incredibly strong position, but needs to maintain it until Boris decides to leave or falls under a political bus.  And austerity on the scale that would be required to fix the Covid hole in the public finances would last for years and make the Chancellor deeply unpopular with both party and country.

Luckily, he doesn’t have to fix the hole. As interest rates remain at historically low levels, the public finances are in fact already on a sustainable footing. The cost of interest on our national debt is only 2.5 per cent of primary tax receipts, the lowest level for fifteen years, and 3.5 per cent below the ceiling of 6 per cent that the Government signed up to in 2019. The austerity years under George Osborne have put Britain in a good debt position, and given Sunak the opportunity to simply postpone the problem. Post Brexit and Covid, the last thing the UK economy needs is anything that might suck demand and confidence out of the economy. Companies are cautiously optimistic; despite being stuck in a vortex of Teams calls, business leaders are planning for growth. But it’s very fragile, this potential recovery, and needs all the government support it can get.

Of course, the Chancellor can not explicitly say this for fear of making the markets nervous, and the belief of some investors that rising debt levels around the world will make it too tempting for governments to let inflation erode the value of their debts. But as long as he can demonstrate that he has a plan for weaning Britain off its current public spending splurge – in other words, moving the current budget back towards balance – he can then argue that the one-off increase in debt related to Covid was an exceptional capital event that should be paid back over decades.