A vaccine may bring the virus under control, but there is no quick fix for the economy
“Our health emergency is not yet over, and the economic emergency has only just begun.”
The chancellor went on to reveal that the UK economy will shrink by 11.3% this year.1
Hopes for a V-shaped recovery now sit firmly in the past.
The government has made it clear that in the short-term, it will continue to provide the financial support needed to help the country through the crisis. Spending in 2021 will prioritise the distribution of a vaccine, support for firms in the private sector, and a rise in the national living and minimum wage.
But with government borrowing at a historic peacetime high, the Treasury has also stressed that rising public debt is unsustainable.
“We could only act in the way we have because we came into this crisis with strong public finances,” argued the chancellor. “And we have a responsibility once the economy recovers to return to a sustainable fiscal position.”
That is a message that will be repeated throughout the coming months and will likely be used to justify tax rises in 2021.
The Conservatives’ need to defend their reputation for fiscal responsibility could overrule manifesto pledges made in 2019 to not increase Income Tax, VAT or National Insurance.
Despite refusing to reintroduce austerity, the government has hinted that it will try and fill the hole in its finances through targeted spending cuts and possible tax increases.
The reduction in overseas aid and a public sector pay-freeze (a cut in real terms, after inflation) are signs that the government is trying to limit the damage to public finances as much it can right now.
But more wide-ranging measures will be needed in the months and years ahead to repair the ‘scarring’ the economy has suffered this year.
“When considering any tax reform, as well as the amount of additional tax revenue reform will generate, the chancellor will have to consider the potential impact on the economy as well as who shoulders the burden of increased taxes,” notes Tony Wickenden, Technical Business Development Director at St. James’s Place.
“There seems little doubt that in the coming years the importance of taxation and tax planning is going to feature strongly in the financial planning process,” he adds.
Many of the world’s major economies have taken a severe hit as a result of COVID-19. But the challenges facing the UK extend beyond the pandemic. Brexit uncertainty could compound the dangers facing the economy, leaving the road ahead for the Treasury – and the country – a long and difficult one.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1OBR, Nov 2020
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As a Chartered Financial Planner and Fellow of the CII, I have satisfied rigorous criteria relating to professional qualifications and ethical good practice.
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