UK

Covid black hole in public finances ‘is less bad than feared’ thanks to vaccine surge

Boris Johnson today insisted the UK economy will prove ‘pessimists’ wrong with a surging recovery amid claims the black hole in the government’s finances could be smaller than the £40billion previously feared.

The PM dropped a heavy hint that the forecasts accompanying the Budget will give Rishi Sunak a boost, as the vaccine rollout continues at breakneck speed.  

He said growth ‘could be much stronger than many of the pessimists have been saying over the last six months or so’.

Mr Sunak has been rolling the pitch for tax rises in his crucial financial package on Wednesday, stressing the need to shore up the Treasury after the pandemic.

He is expected to keep pouring money into the response, extending the massive £50billion furlough scheme and other support for businesses until at least the end of June. 

However, Mr Sunak is also set to lay out a grim timetable of hikes to bring in more revenue and stop debt spiralling out of control. Corporation tax is almost certain to go up, while income tax thresholds could be frozen to drag more people into the higher bands. 

Tory MPs warning against such increases were given fresh ammunition this morning amid reports that the gap in the finances might not be as huge as previously feared. 

There have been estimates that there could be a permanent shortfall of around £40billion, with the Office for Budget responsibility having put the figure at £29billion in November before renewed lockdowns.

However, sources told the Financial Times that while the number had ‘fluctuated’ it was now likely to be smaller. 

‘The successful rollout of the vaccine is a material change in the last few months,’ one insider close to the Budget process said. 

Growth in 2021 could be the fastest for almost 50 years – although it is from a very low base after the worst downturn in 300 years – with GDP likely to recover to 2019 levels early next year. 

Meanwhile, a poll for MailOnline by Redfield & Wilton Strategies today underlined the political challenges for Mr Sunak as he puts the finishing touches to his plans.

It found Tory voters would prefer to see the burden taken by spending cuts rather than tax rises, by a margin of 44 per cent to 36 per cent. There was opposition to income tax rises in general, although there was backing for higher levies on corporations.    

A poll for MailOnline by Redfield & Wilton Strategies today underlined the political challenges for Rishi Sunak as he puts the finishing touches to his Budget plans

There was opposition among Tory voters to income tax rises in general, although there was backing for higher levies on corporations

There was opposition among Tory voters to income tax rises in general, although there was backing for higher levies on corporations

On a visit to a school in Stoke-on-Trent today, Boris Johnson said he was confident the Budget would 'build on everything we have done' to look after businesses and the public throughout the coronavirus crisis

On a visit to a school in Stoke-on-Trent today, Boris Johnson said he was confident the Budget would ‘build on everything we have done’ to look after businesses and the public throughout the coronavirus crisis

Government is losing up to £52bn every year to fraud 

The government is losing up to £52billion a year due to fraud – more than the entire defence budget.

The staggering scale was revealed in an assessment slipped out by Whitehall, which also warned that the problems could be reaching ‘epidemic’ levels as criminals exploit coronavirus bailouts.    

Government auditors have warned that criminals might be milking billions of pounds from the huge furlough scheme, emergency grants and and loans introduced since the pandemic began.  

But a briefing slipped out last week from the Whitehall counter-fraud operation underlines that abuse was already running high even before the crisis.  

It gives a figure of £29.3billion-£52billion for the annual amount lost by the government, including through the tax and welfare system. 

The estimates are extrapolated from ‘loss measurement activity’ across government. By contrast, Ministry of Defence spending is only around £41billion a year.

It could give food for thought for Rishi Sunak as he prepares to unveil a crucial Budget this week, warning of tax rises to repair the damage to the public finances from lockdown.    

Meanwhile, separate research from reputation consultancy 5654 & Company found 56 per cent of people now believe damage to the economy is the biggest risk over the next 12-months, compared to 37 who said it was health impacts.

That was up from 30 in May last year, and 39 per cent in October. 

Some 70 per cent said the economy was the bigger problem over the next five years, compared to just 24 per cent who said it was public health. 

On a visit to a school in Stoke-on-Trent today, Mr Johnson said he was confident the Budget would ‘build on everything we have done’ to look after businesses and the public throughout the coronavirus crisis.

‘I’m not going to anticipate what the Chancellor is going to say on Wednesday,’ he said.

‘But I am absolutely confident that it will be a Budget that builds on everything we have done to look after the businesses and the people of this country throughout the pandemic.

‘But that also paves the way for a strong, jobs-led recovery. That’s what our focus is going to be on.’

He added: ‘I have no doubt that if we get it right, as I’m sure we can, we can have a strong, jobs-led recovery, that I think could be much stronger than many of the pessimists have been saying over the last six months or so.’ 

The UK passed the landmark of 20million vaccine doses yesterday, far outpacing most other countries in the world.

The rollout has sparked confidence that lockdown will be able to ease soon, although Boris Johnson has rejected suggestions that his ‘roadmap’ timetable could be stepped up.

There are also concerns that a worrying Brazil variant could derail the reopening plan, after cases were detected in the UK for the first time. Experts say it cold sidestep immunity, making the current crop of vaccines less potent.  

In a round of interviews yesterday, the Chancellor all but confirmed that the £50billion furlough scheme and other Covid support measures will continue until the end of June.

The measures are likely to cost at least £15billion, and will be supplemented by other short-term support, including a £5billion fund for high streets.

But in a series of interviews, Mr Sunak indicated that this week’s Budget should be the last with major giveaways.

He is said to be already planning a second Budget in the autumn in the hope an economic recovery will allow him to set out a more detailed plan for tax rises to restore the battered public finances.

This could include increases to capital gains tax, hikes in national insurance for the self-employed and cuts to pension tax relief.

It is understood the Chancellor will also delay the publication of new ‘fiscal rules’ governing tax and spending until that point.

But Whitehall sources confirmed he will start the process of closing the huge black hole in the nation’s finances this week by freezing income tax thresholds for at least three years.

The move, which will raise £6billion and drag 1.6million people into higher tax bands, prompted an outcry from Tory MPs last night.

Mr Sunak is also set to raise corporation tax from 19 per cent to 20 – and set out a ‘pathway’ to increase it to 23 per cent.

Each percentage point raises roughly £3.3billion for the Treasury, although the gains will get lower as the rate approaches a level where it hits UK competitiveness. 

The Chancellor said he had to ‘level with people’ about the scale of the economic challenge.

The UK looks to have avoided a double-dip recession after growth stayed positive in the fourth quarter of last year

The UK looks to have avoided a double-dip recession after growth stayed positive in the fourth quarter of last year 

Covid black hole in public finances 'is less bad than feared' thanks to vaccine surge

Covid black hole in public finances 'is less bad than feared' thanks to vaccine surge

‘I think in the short-term what we need to do is protect the economy and keep supporting the economy through the roadmap, and over time what we need to do is make sure our public finances are sustainable,’ Mr Sunak said.

‘That isn’t going to happen overnight.’

A long-term deficit of more than £40billion would be equal to about 8p on the basic rate of income tax.

The crisis has also led to record borrowing of almost £400billion, pushing the national debt to £2.1trillion.

The Chancellor said an ‘honest and fair’ plan was needed and the huge borrowing had left the UK vulnerable to even a small rise in interest rates. 

Treasury sources said even a one-point rise could require an extra £25billion in interest payments.

Office for National Statistics numbers published this month showed state debt was above £2.1trillion in January

Office for National Statistics numbers published this month showed state debt was above £2.1trillion in January

The Office for Budget Responsibility (OBR) has said it expects the public sector might borrow as much as £393.5 billion by the end of the financial year in March

The Office for Budget Responsibility (OBR) has said it expects the public sector might borrow as much as £393.5 billion by the end of the financial year in March

The Office for National Statistics said last month that over the whole of 2020 the economy dived by 9.9 per cent - the worst annual performance since the Great Frost devastated Europe in 1709

The Office for National Statistics said last month that over the whole of 2020 the economy dived by 9.9 per cent – the worst annual performance since the Great Frost devastated Europe in 1709

Mr Sunak will make jobs a priority and is considering a National Insurance holiday for employers who take on new staff.

But in the short-term he made clear the costly package of economic support credited with propping up millions of jobs will continue.

‘We went big, we went early and there’s more to come and people should feel reassured by that,’ he said.

Tory MPs have stepped up pressure on the Chancellor to avoid any tax rises.

Former party leader Sir Iain Duncan Smith said that even freezing income tax thresholds would be a ‘mistake’ that would punish thousands of ordinary families.

Under the Treasury plan, the starting point for paying income tax would be frozen at £12,500, while the 40p rate would continue to start at £50,000.

 Government sources insisted that such a move would not break Boris Johnson’s ‘triple lock’ on tax, which pledged no increase in the headline rates of income tax, national insurance or VAT.

But Sir Iain said: ‘You will end up dragging more people like teachers and senior nurses into a 40p rate that was originally meant for the rich.’

In a letter to the Chancellor, 45 Tory MPs from the Northern Research Group called for business rates to be reduced from 50 per cent of market rents back down to 35 per cent. 

How Rishi Sunak is set to tackle government cash crisis 

Extending furlough

Likelihood: The £50billion job protection scheme is certain to be extended from its current end point on April 30. Extension likely to be until at least the end of June – and possibly September.

Raise corporation tax

Likelihood: Rishi Sunak will raise the tax on business from 19 per cent to 20, and set out a ‘pathway’ to raising it to 23 per cent. But an exemption for entrepreneurs is possible.

Increasing income tax

Likelihood: A manifesto pledge not to raise the headline rate will constrain the Chancellor. But he is expected to freeze income tax thresholds for three years, dragging 1.6million into higher rates.

Raising fuel duty

Likelihood: Sources say Boris Johnson has vetoed the Chancellor’s plan for an immediate 5p hike. But Mr Sunak could try to introduce a smaller rise – and will signal his intention to end the ten-year freeze at some point.

Taxing self-employed

Likelihood: Mr Sunak said last year that a bailout for self-employed workers raised questions about their preferential tax treatment. Treasury sources played down reports he was planning an immediate hike on their National Insurance contributions.

Longer stamp duty holiday

Likelihood: The Chancellor is expected to extend the tax break on purchases of homes worth less than £500,000 from the end of this month – probably until the end of June. Experts believe it could generate an extra 200,000 sales.

Tax on parcels

Likelihood: Ministers have already brought in a digital services tax on profits and are considering an online sales tax as part of a wider review of business rates. Sources played down reports of a new ‘green’ tax on online deliveries.

increasing capital gains tax

Likelihood: Officials have examined bringing the tax on property and assets in line with income tax rates. But sources played down the prospect of immediate action this week. Equalising capital gains tax would see rates rise from 20 per cent on assets and 28 per cent on property to 40 per cent for higher rate taxpayers.

A green deliveries levy on online retailers (pictured: Such as Amazon) is one route Mr Sunak could take, according to the Sunday Telegraph

A green deliveries levy on online retailers (pictured: Such as Amazon) is one route Mr Sunak could take, according to the Sunday Telegraph 

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