The UK economy (along with many others) has been ravaged by the global pandemic, with public debt levels not seen for many decades. But there are also other seismic shifts affecting the UK. The UK has left the EU, fundamentally changing trading relations with both the EU and third countries, and the US has a new President who is expected to introduce very different economic and tax policies to his predecessor.
It is the task of the Chancellor to steer the UK through these tricky financial waters. His meteoric rise to one of the most senior positions of power in the country may feel like a bittersweet success as he looks across the current landscape and seeks inspiration for a set of economic and tax policies that he hopes will create economic nirvana.
The Government must decide whether it is to tolerate the high debt burden, hoping that interest rates stay low for the foreseeable future, or to actively try to bring the debt burden down. GDP growth might act to reduce the relative debt burden, but it is likely that more will be needed. To make real inroads a combination of tax rises and austerity are likely to be required, and austerity may not look like an attractive option when the pandemic has exposed weaknesses in public services that need to be fixed.
The widespread expectation is therefore that taxes will have to rise to help pay down the debt and invest in areas of public services, such as the NHS. Economically, the Chancellor also needs to spur GDP growth and tackle the unemployment crisis caused by the pandemic. Tax increases will help the deficit situation but tend to act as a drag on unemployment and GDP growth. On the other hand, some believe that tax cuts are the answer, spurring growth in both GDP and employment to generate increased tax revenues and ease public debt.
Imposing tax rises at this point will be challenging. The Government made a “triple tax lock” manifesto commitment not to increase the rates of income tax, NIC and VAT during this parliament. Tax rises may need to be bold to raise the revenues necessary to make a significant impact on public debt, and these three are the workhorses of tax revenues. Leaving these three taxes untouched will inevitably hinder the Chancellor’s flexibility, but the prospect of breaking manifesto commitments may be too politically unpalatable to consider.
The Government still has to deliver on their agenda of levelling-up and making an economic success of Brexit. Climate change still needs to be tackled. Finally, lest we forget, the pandemic has exposed more starkly intergenerational issues with the young taking much of the brunt of economic hardship arising from the pandemic.
It all looks like a roulette style gamble not unlike the Wheel of Fortune television game show, where contestants compete to solve puzzles, to win cash and prizes. The title refers to the show's giant carnival wheel that contestants spin throughout the course of the game to determine their fate. In a sense, the Chancellor has a spin of the wheel and it could land on any of the wedges, a free spin, miss a turn, gamble, etc. So, let’s play: