Speaking in parliament on Wednesday, UK finance minister Rishi Sunak pledged another £65 billion ($91 billion) to extend emergency support measures for workers and businesses, while making the case that public finances will need to be repaired once the country’s rapid vaccine rollout has eased the economic pain caused by the coronavirus pandemic.
“Just as it would be irresponsible to withdraw support too soon it would also be irresponsible to allow future borrowing and debt to be left unchecked,” he said, cautioning that rising interest rates could make debt levels unsustainable.
The UK government has borrowed vast sums of money to fund over £400 billion ($558 billion) in stimulus during the crisis. Total government debt has soared to £2 trillion ($2.8 trillion), or close to 100% of GDP, a level not seen since the 1960s, according to the Office for National Statistics.
“It’s going to be the work of many governments over many decades to pay it back,” said Sunak, who took charge of the Treasury just weeks before the coronavirus crisis exploded in the United Kingdom last March.
UK GDP fell nearly 10% over the course of 2020, returning the economy close to the size it was in 2013. An ongoing nationwide lockdown imposed on January 5 is expected to hit the economy hard in the first quarter of 2021, while disruption to EU-UK trade following the Brexit transition period on December 31 is also weighing on activity.
Sunak announced plans to hike corporation tax from 19% to 25%, keeping it below the level in most major economies. The higher rate will take effect in April 2023 and will only apply to companies with annual profits of £250,000 ($349,000) and above, affecting 10% of businesses, he added. Companies with profit below £50,000 ($69,800) per year will continue to be taxed at the lower rate.
Alongside tax hikes, Sunak announced incentives to boost business investment over the next two years. He has also extended reductions in sales taxes until the end of September, with relief for hospitality, tourism and leisure businesses sustained into next year.
A major tightening in fiscal policy, mainly driven by higher taxes, could put the economic recovery on “shaky ground,” Capital Economics senior economist Ruth Gregory wrote in a research note last week.
“The risk is that over the next two years [Sunak] will be tempted to pull the rug out from under the feet of households and businesses by reducing the budget deficit at a faster pace than is currently scheduled,” Gregory said. “Not only would that undermine the economic recovery, but it could also cause more problems for the public finances than it solves,” she added.
The government will extend its jobs support program for a third time and keep enhanced welfare payments in place.
Sunak pledged to keep subsidizing wages of workers on furlough until September, with businesses asked to contribute to costs starting in July. The pandemic has already wiped out more than 700,000 jobs and left roughly 4.7 million people relying on the state to pay the bulk of their salaries, government data shows.
He also set out plans to increase support for the self-employed and channel £5 billion ($7 billion) in “restart grants” to over 600,000 companies in the hospitality industry, worth up to £18,000 ($25,000) each. A new lending program will enable businesses to apply for government-backed loans of up to £10 million ($14 million) until the end of the year.
The UK economy will be 3% smaller than it otherwise would have been in five years’ time because of the pandemic, according to the Office for Budget Responsibility. However, the rapid rollout of effective vaccines “offers hope of a swifter and more sustained recovery,” the independent fiscal watchdog said Wednesday.
The OBR now expects the economy to return to its pre-pandemic level in the middle of 2022 — six months earlier than it projected in November. Unemployment is expected to peak at 6.5% in the final three months of this year, down from a 7.5% forecast previously.
Read More: Budget 2021: UK promises billions more in stimulus. But tax hikes are coming soon