The daunting tax problems facing Britain’s next Chancellor | Economic policy

The Chancellor chosen by the new British Prime Minister will face a daunting array of problems upon taking office.

Whoever takes the treasury hot seat will find themselves in a position similar to that of Rishi Sunak in March 2020 when the pandemic hit and the economy had to be shut down for several months.

Nadhim Zahawi, the current Chancellor, is widely expected to be replaced under a Truss or Sunak government. In its final weeks, the Treasury has hammered out a menu of options for the new Prime Minister to deal with the cost of living crisis.

Here we describe the main points of the agenda:

Household support

Both Truss and Sunak have pledged to help families prepare for the typical energy bill of £3,549 from October, at a time when inflation is already double digits and some economists say that it could reach 22% – close to a post-war high – if high oil and gas prices are sustained.

Any package would likely build on or replace the £15billion support announced by Sunak in May, reflecting the continued sky-high prices in wholesale energy markets seen in recent months amid Russia’s war. in Ukraine.

The Resolution Foundation has warned that families will see their purchasing power reduced by an average of £3,000 by the end of next year unless the new government acts to counter the biggest impact on the level life for a century. Forecasts from Cornwall Insight show Ofgem’s price cap could approach £7,000 for a typical bill by the autumn of next year, more than six times the level a year ago a year.

Truss has pledged around £30billion in the Tory leadership campaign to reverse a hike in National Insurance payments for Sunak employees earlier this year, income tax cuts and a commitment to block a corporate tax increase.

Sunak has pledged to increase a £650 payment due in October for households on means-tested benefits.

Business support

UK Chambers of Commerce have called on the government to accept a temporary 5% VAT cut on energy bills and a Covid-style emergency energy subsidy for small and medium-sized businesses.

“The government must urgently tackle high energy prices and the cost of doing business crisis to boost productivity and generate economic growth for the UK,” he said.

Zahawi confirmed that targeted cuts in VAT and commercial rates are being prepared by Treasury officials to help the retail and hospitality sectors, but did not say how much it would cost.

He expects the next Prime Minister to also offer tax breaks to energy-intensive industries to get through the winter.

So far, there’s not much else to offer businesses to cushion the blow of rising energy costs. Companies have complained about the added burden of higher wages which follow severe skills shortages in many sectors and falling sales as the UK enters recession must also be taken into account when a recovery plan rescue is agreed.

Public finances

Investors have grown wary since Russia’s invasion of Ukraine exposed the UK’s vulnerability to an energy and food shock.

While ministers succeeded in reducing Russian gas imports to zero, the UK continues to pay the world market price for its own gas and for imports from the Middle East.

Fertilizer and transport costs have skyrocketed, driving up the price of domestic and imported food. Imports account for around 40% of UK food sales.

Investors also fear Brexit will mean limited access to workers and the UK will have a severe skills shortage, driving up wages.

Those fears drove the pound down and raised the interest rate on Britain’s debt, which climbed in August to the fastest monthly rate in nearly 40 years.

Yields on ten-year UK government bonds, which are a proxy for the effective interest rate on government bonds, rose to 2.78% to register the biggest monthly rise since September 1986.

The pound fell from $1.36 in March to just over $1.15 last week as confidence in the UK’s ability to recover strongly from the crisis waned.

An expected borrowing cost of £83billion is expected to be closer to £110billion, according to consultancy Capital Economics, on a spending budget of nearly £1billion.

This is a significant increase and brings the annual interest bill to over 10% of spending, but when the world borrows more to deal with the current crisis, investors will be ready to lend to the UK government.

Economic growth

The new Chancellor will enter the Treasury with alarm bells ringing for economic growth. Some analysts are warning that the economy has already fallen into recession this summer, while the Bank of England expects a prolonged downturn triggered by the cost of living crisis to begin this winter.

Consumer spending is set to plunge in the opposite direction as households tighten their belts to deal with soaring energy bills, with a ripple effect on recovering hospitality, leisure and retail businesses barely from the Covid pandemic.

The recession is expected to push up unemployment as businesses come under pressure, reversing the post-lockdown trend of chronic staff shortages, amid a period of strained labor relations between unions, some employers and the government.

Restarting the country’s faltering growth engine will be a key priority, although experts warn this is easier said than done. Truss has set himself an annual growth target of 2.5%, promising tax cuts, “supply-side reforms” and scrapping EU spin-off laws to achieve his goal.

Analysts at consultancy Capital Economics say Truss’ tax cut plans and immediate support for families struggling with their energy bills could add around 1.3% to GDP, but not in a year, but would cost nearly £50 billion.

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