By Jason Douglas and Paul Hannon
LONDON -- The U.K. plans to increase taxes from 2023 to cover
the heavy costs of the coronavirus pandemic, as new forecasts show
a rapid vaccination drive means its economy is set to make up
ground lost to Covid-19 sooner than previously hoped.
The decision puts the U.K. first among major economies to set
out plans to repair the damage to public finances caused by efforts
to contain the pandemic as the government continues to spend big to
keep businesses and households afloat. The U.K. suffered its worst
downturn in more than 300 years in 2020 and experienced one of the
deadliest coronavirus outbreaks in the world.
Britain is, however, on course to recover later this year as a
speedy vaccination drive paves the way for reopening its economy.
The U.K. has so far administered at least one dose of vaccine to
almost one-third of its population, and plans to offer vaccination
to all adults by the end of July. The U.S. has so far vaccinated
around one-fifth of its citizens. The European Union has given
shots to 7.5% of its population.
Forecasts from the Office of Budget Responsibility, the U.K.'s
fiscal watchdog, show the economy is expected to recover its
pre-pandemic size by the second quarter of 2022. That is six months
sooner than the body forecast in November, and brings it into line
with expectations of recovery across the European region. The
European Commission expects the 27-country European Union to regain
ground lost by mid-2022.
U.K. Treasury chief Rishi Sunak said Wednesday he would extend
support for idled workers and businesses at least until September,
with a mix of measures including taxpayer subsidies for employer
payrolls, tax breaks for closed businesses and grants to the
self-employed.
He added, though, that government borrowing is set to reach its
highest level as a share of national income since World War II, and
said that once a recovery is under way, the government will need to
begin fixing public finances. Government borrowing is forecast to
fall from 17% of national income in the current fiscal year to
10.3% next year, with total debt peaking at over 97.1% of national
income in 2023-24.
Mr. Sunak set out plans to raise the corporate tax rate to 25%
from 19% from April 2023 and to freeze tax-free allowances on
personal income. Together, the measures are forecast to raise 65
billion pounds, equivalent to around $91 billion, for the Treasury
through the fiscal year ended March 2026.
"Coronavirus has caused one of the largest, most comprehensive
and sustained economic shocks this country has ever faced," Mr.
Sunak said.
U.K. government bonds, known as gilts, sold off as investors
anticipated an increase in new bond issues. The benchmark 10-year
bond yield rose as high as 0.789%, up from 0.704% Tuesday.
The plans announced by Mr. Sunak comes as Congress considers a
$1.9 trillion relief package proposed by President Biden. That
would be a much larger stimulus than any considered by a European
government this year, amounting to roughly 10% of U.S. annual
economic output, though the package includes items such as
healthcare spending and unemployment benefits that are considered
normal spending by most European governments.
Economists say the outlook for fiscal policy across the world
depends on the course of the pandemic. New variants of the virus
are cropping up, pushing up caseloads and prompting governments to
tighten restrictions. Evidence of vaccines' effectiveness against
new versions of a pathogen that has already claimed at least 2.6
million lives globally is mixed.
"If the recovery is delayed, for example because of new waves of
infections, this means that support will need to be maintained for
longer than expected, and fiscal deficits will become larger," said
Alfred Kammer, director of the European department at the
International Monetary Fund.
The European Union last year suspended its budgetary rules that
seek to limit deficits for 2020 and 2021 to clear the way for
higher spending by member states. It has yet to decide whether to
extend that suspension into 2022, though the European Commission,
the bloc's executive arm, signaled Wednesday it was likely to do so
on the grounds the region's economy isn't likely to return to its
precrisis size until the middle of next year.
Mr. Sunak's decision to raise the tax rate charged on corporate
profits in Britain marks a departure from the government's approach
to lowering its debts after the global financial crisis, which
focused on cutting spending.
The move also reverses a decadeslong decline in the corporate
tax rate that began in the early 1980s under the leadership of
Margaret Thatcher.
That 19% rate is the lowest in the Group of Seven advanced
economies. The corporate tax rate in the U.S. is 26%, according to
the Organization for Economic Cooperation and Development. In
France it is 32% and in Germany and Japan, just under 30%.
"Over the last 15 years, corporate income-tax rates went in only
one direction," said Craig Hillier, leader for international tax
services at Ernst & Young Americas. "Are we at a point where
governments are reconsidering that in light of the pandemic and
fiscal pressures? There probably is a reflection on rates."
President Biden also wants an increase in the corporate tax rate
as a way of recouping some of the costs of supporting the economy
through the pandemic, although it isn't clear that Congress will
back that move.
Mr. Sunak said the U.K. government would introduce new tax
incentives to power recovery with increased business investment.
Businesses will for the next two years be able to offset any
investment against their tax bill with a "super deduction" of up to
130% of the cost of the investment, he said. Mr. Sunak also has
plans to build a network of freeports in the U.K. to encourage
investment in new factories and jobs.
The OBR said it expects the U.K. economy to grow 4% this year,
and 7.3% in 2022. That compares with forecast growth of 5.5% in
France this year and 3.2% in Germany, according to forecast from
the European Commission. The commission expects France to grow 4.4%
in 2022 and Germany, 3.1%.
Anna Hirtenstein contributed to this article.
Write to Jason Douglas at jason.douglas@wsj.com and Paul Hannon
at paul.hannon@wsj.com
(END) Dow Jones Newswires
March 03, 2021 11:38 ET (16:38 GMT)
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