The UK budget extends near-term budget support for households and businesses and aims to bolster the post-Covid-19 economic recovery, while also signalling that fiscal consolidation will follow the pandemic, Fitch Ratings says.
The budget for the fiscal year to April 2022 (FY22) announced by Finance Minister Rishi Sunak on Wednesday extended key support measures, such as the Coronavirus Job Retention Scheme (the furlough scheme) and the uplift to Universal Credit social security payments by six months, beyond the 21 June date when the government hopes to remove all legal limits on social contact under its roadmap for lockdown easing. Sunak also announced a temporary ‘super-deduction’ tax break to encourage companies to invest, worth GBP25 billion over two years.
The independent Office for Budget Responsibility (OBR) estimates the total fiscal loosening in the budget at 2.6% of GDP for FY22. However, Sunak also said that medium-term risks from rising public debt could not be ignored.
He announced two key revenue-raising measures – freezing personal tax thresholds for five years once this year’s scheduled increases have taken effect, and increasing corporation tax to 25% from 19% for companies with profits above GBP250,000 from April 2023 (the rate will taper for companies with profits between GBP50,000 and GBP250,000).
The budget is consistent with our view when we affirmed the UK’s ‘AA-’/Negative sovereign rating in January that fiscal policy would remain accommodative for some time, focusing on job and income protection in response to the health crisis, and continuing to increase government debt-to-GDP in the medium term.
The budget did not include new fiscal rules or explicit fiscal targets (the review of the fiscal framework announced in 2020 will continue), reflecting the continuing uncertainty of the course of the pandemic; but it outlined guiding principles, including reducing the current budget deficit and stabilising government debt.
Nevertheless, announcing two revenue-raising measures to take effect from specific dates gives some substance to Sunak’s earlier pledge to put public finances ”back on a sustainable footing.” The OBR estimates that corporation tax will yield 2.9% of GDP in FY24 up from 2.1% in FY20, and the freeze in income tax thresholds will deliver 0.7pp of GPD between FY23 and FY26.
Overall, the OBR estimates that measures announced in the budget would almost eliminate the current budget deficit by FY26, while public-sector net debt peaks at 109.7% of GDP in FY24 and falls to 103.8% by April 2026. We assumed in our January 2021 rating review that gross general government debt would rise to 120% of GDP over the medium term given the lack of announced fiscal consolidation measures at the time.
Sizeable fiscal risks remain from the uncertain path of the economic recovery, possible delays to the government’s lockdown easing roadmap, and potential legacy spending pressures from the pandemic, such as the need to spend more on health services or education, both of which have been disrupted by the lockdowns.
The government’s pledge to ‘level up’ the UK economy by investing in disadvantaged areas could also be a source of spending pressure post-pandemic, which could slow the pace of fiscal consolidation.
