(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

LONDON - Rishi Sunak may fail to maximise Britain’s vaccine-enhanced head start. The UK finance minister on Wednesday confirmed he would keep paying pandemic-hit Britons’ wages until September. That’s sensible, but a decision to prioritise longer-term tax hikes over investment may be less so.

Britain’s economic outlook improved from last November. Back then the Office for Budget Responsibility reckoned the virus would see the country’s borrowing soar this year to nearly 400 billion pounds. Now the forecast is for it to reach 355 billion pounds and for GDP to recover to pre-pandemic levels by mid-2022, six months earlier than feared. Thank the government’s speedy vaccination programme, and the dodging of a no-deal Brexit which would have knocked 2 percentage points off national output.

At first sight, Sunak’s tax takeaway looks more like a giveaway. In the year ending in April 2022, he will add nearly 60 billion pounds of borrowing to pay for the furlough extension, and to significantly incentivise companies to bring forward capital investments by using them to reduce their tax bills. But within three years he will be cutting borrowing to the tune of 30 billion pounds a year, largely by increasing corporation tax from its current 19% to 25%.

Sunak’s decision to stiff business rather than hard-pressed households sounds politically smart. But it may not work if businesses hold off investing due to fears of a rising tax burden. And his stimulus looks meagre against the Biden administration’s $1.9 trillion plan, which is 9% of the United States’ GDP, and also relative to the 100 billion pound series of measures targeted at lower-income Britons advocated by the Resolution Foundation think tank. The latter would have amounted to 5% of UK GDP.

The government’s cover not to go further comes from the Office for Budget Responsibility, which thinks the slack in the economy as measured by the so-called output gap is small. But other forecasters like the International Monetary Fund think this gap, and thus the need for stimulus, may be more tangible. Sunak’s course out of the pandemic relies a lot on businesses being sufficiently robust to bounce back when he stops paying their wage bills in September – and starts taxing them more.

 

CONTEXT NEWS

- Finance minister Rishi Sunak on March 3 announced an extension of his emergency aid programmes to see the economy through its current coronavirus lockdown.

- The UK government said it will raise the rate of corporation tax, paid on company profits, to 25% in 2023.

- The government’s spending plans also included a tax incentive that it labelled the “Super Deduction” which will allow companies to cut their tax bill by up to 130% of the cost when they invest in their businesses.

- Britain will extend its job-protecting furlough programme by five more months until the end of September and expand support for the self-employed too.

- Sunak did not raise the rates of income tax, national insurance, or value-added tax.

- The Office for Budget Responsibility also released economic forecasts on March 3. The OBR expects GDP to return to its pre-pandemic level by the middle of next year - six months earlier than it previously thought.

- Net borrowing has also improved since last November when the OBR forecast the country would borrow nearly 400 billion pounds in the current 2020-2021 financial year. Its revised estimate was 355 billion pounds, 16.9% of GDP.

- However, the OBR cut its forecast for economic growth for 2021 from 5.5% last November to 4%.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by George Hay and Karen Kwok) ((Aimee.Donnellan@thomsonreuters.com; Reuters Messaging: Aimee.Donnellan.thomsonreuters.com@reuters.net))