Will we have an emergency Budget in July?

Ending weeks of speculation, Chancellor Rishi Sunak will hold an emergency Budget in all but name on Wednesday 8 July 2020 to usher in new support measures to help the economy move out of the coronavirus lockdown and to get the country working again.

In what is billed as a Summer Economic Update, he wants to rebuild the economy with new job creation schemes to help deal with rising unemployment.

2.1 million people claimed unemployment benefits in April. This represents a 69% increase in claimants (over 850,000 people) from March (Source: House of Commons Library)

According to reports in both The Times and the Financial Times, the Chancellor had pencilled in a Budget for the week beginning 6 July.

This has now been confirmed by the Treasury as Wednesday 8 July.

The Shadow Chancellor, Anneliese Dodds, had called for a full emergency summer Budget  It should aim to prevent unemployment, improve skills training and give more generous support to those who have lost jobs, Ms Dodds told the Financial Times on 16 June..

July is a key month

July sees stage three of the Prime Minister's three-stage plan to get the country back to work, including the re-opening of parts of the hospitality industry and other public places.

It also coincides with the likely passing of the current finance bill, which is still making its way through Parliament. And it will be informed by the progress - or otherwise - of the ongoing Brexit negotiations.

The Spring 2020 Budget saw the launch of the Comprehensive Spending Review that was meant to conclude in July, with public spending plans determined up to 2024-25. Although this review has now been delayed until later this year, the Chancellor may still wish to incorporate something on this in his July Budget.

With the furlough scheme entering a more flexible phase from July (and employers expected to start paying their share) - with a view to it ending by 31 October - and the self-employed income scheme ending in August, the government is expecting a substantial rise in unemployment in the summer, with businesses slimming down, some unable to fund furloughed employees' wages, or unable to re-start after the lockdown.

Outlook

More than two million jobs could be lost, and the country could be facing the worst recession since the Great Frost of 1709, according to the Chancellor.

There could also be a second waive of the coronavirus in the autumn, and the Treasury may want to anticipate how that might impact the economy, should there be the need for another lockdown.

Possible Budget measures

Against that stark economic backdrop, Mr Sunak is keen to bring forth government spending commitments reported to be in the region of £100bn to provide the country with the financial boost it needs in the post-covid environment.

It may be that kind of 1930's-style infrastructure spending that the Chancellor has in mind for an economic stimulus package.

In that respect, it is less likely to be a tax-raising Budget - though that may still happen in the autumn or in the years to come when recovery is happening - and be more of a spending statement, like the old Pre-Budget reports under Philip Hammond or even Gordon Brown.

The Chancellor has already provided billions of pounds of support to businesses and individuals through grants and loans in order to ensure as many as possible could be helped during the crisis - effectively a lifeline, but what is needed now is a runway to a sustainable recovery.

According to reports, the July Budget could contain three key elements:

• Training - A skills funds to retrain furloughed workers who have lost their jobs when the furlough scheme ends. The Chancellor will want to try to move towards full employment at a sustainable living wage.
• Green Infrastructure - Massive extra infrastructure spending. This is likely to include transport projects and an acceleration of the roll out of gigabit-capable broadband. It will also include green energy projects that help the country move towards decarbonisation and the legal commitment to bring all greenhouse gas emissions to net zero by 2050 (e.g. creating more cycle paths, improving domestic insulation, carbon capture storage and hydrogen technologies, etc.). Many business leaders are lobbying for a green recovery that tackles climate change. It could also mean state funding for domestic telecoms companies to help them develop rival 5G technology to Huawei.
• Tech - A plan to help British-based technology firms. We have already seen the kind of thing that could be proposed, such as the Future Fund and the Clean Growth Fund. There could also be increases in the R&D Tax Credit rebate and in capital allowances.

Reports suggest the Treasury is looking at a scrappage scheme to encourage owners to scrap their existing cars for new electric or hybrid vehicles. This could be linked with a possible advancement of the 2032 date for the banning of new petrol and diesel car sales, and extra funding for electric charging points.

Reports also suggest that the Chancellor is looking at some form of National Insurance holiday for employers, and direct subsidies to firms to recruit new staff.

VAT cut

The Institute for Fiscal Studies has backed calls for a cut in the rate of VAT as part of a broader mix of policies, which it says would have the double benefit of putting cash in people's pockets and encouraging consumers to accelerate their spending. The think tank does, however, suggest that such a move may be more appropriate at the Autumn budget rather than now whilst fear of the virus continues to discourage spending..

The FT has suggested a temporary cut in the VAT rate on pubs, restaurants, hotels and tourist attractions, reducing it from 20% to 5%.

Other measures

Speculating a little further, other possible Budget measures might include:

• A temporary cut in stamp duty
• Changes to the Apprenticeship Levy - linked perhaps to a new skills fund
• Fundamental reform of business rates to remove the regressive nature of the tax
• Another look at how the proposed off-payroll rules will affect the agility of the private sector
• An attempt at equalising NICs between the employed and self-employed
• Further enhancements to R&D tax credits to boost innovation from 1 January 2021 (post Brexit and out of EU state aid rules))
• Launch of a cross-party resolution to social care

Some of these other measures may appear in the Autumn Budget, but the Chancellor may announce consultations in advance of that event.

Thoughts from three former chancellors

Three former Chancellors gave evidence to the Treasury Select Committee on 3 June 2020 about the impact of the coronavirus pandemic. Alistair Darling, George Osborne and Philip Hammond said that the Government should resist tax increases and consider tax cuts, either through VAT or NIC reductions.

Mr Hammond said there was "no economic logic to increasing taxes in the short term". He added that there “may be a need for some short-term fiscal stimulus to the economy and that could be delivered most obviously through tax cuts."

Lord Darling said that cutting VAT could have an immediate effect by pushing down costs for consumers and increasing spending, saying: “If you want to stimulate the economy, the most obvious thing to do is a time-limited VAT reduction.”

Mr Osborne suggested business taxes should be lower, saying he “wouldn't have gone ahead with scrapping the 2p cut in corporation tax”, suggesting it would “send a big signal that Britain is open for business around the world.”

[Gary Mackley-Smith]