Britain doesn’t just have a health crisis – it’s got a major economic headache, too

London: British taxpayers are being warned that wartime-levels of borrowing are unsustainable, although workers will be largely spared in a budget which targets big business to help pay for the mammoth spending which has shielded the economy from near-collapse.

The government will have spent at least £407 billion ($730 billion) on stimulus payments, wage subsidies and other support by the time the coronavirus crisis is hoped to subside next year, pushing borrowing to heights not seen since World War II.

Chancellor of the Exchequer Rishi Sunak with the traditional red dispatch box containing his budget speech.Credit:Bloomberg

Chancellor Rishi Sunak on Wednesday spent billions more to keep the economy afloat while restrictions are phased out. But he warned debt as a share of GDP would peak at nearly 100 per cent and sacrifices would have to be made to pay it down.

Other countries in Europe are facing the same problem but are wary of returning to controversial austerity measures or dipping into pay packets when workers are already struggling.

The UK borrowed £355 billion this financial year and will next year borrow £234 billion.

“The amount we’ve borrowed is comparable only with the amount we borrowed during the two World Wars,” Sunak told the House of Commons.

“It’s going to be the work of many governments over many decades to pay it back. Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

Sunak, a relative unknown before his elevation to Chancellor last February who is now the most likely successor to Prime Minister Boris Johnson, said he was alarmed that high debt would limit the government’s ability to respond to the next crisis. Interest rates and inflation also won’t stay low forever, he said.

“And just a 1 percentage point increase in both would now cost us over £25 billion.”

As a first step, the corporate tax rate will rise from 19 per cent – the lowest rate of all advanced economies – to 25 per cent in 2023. Most small businesses will be exempt from the increase.

Malcolm Turnbull tried to cut Australia’s corporate tax rate from 30 to 25 per cent over a decade but the full plan was blocked in the Senate.

In Wednesday’s budget Sunak clawed back about £19 billion by freezing any future rise in income tax thresholds, however he ruled out increasing the rates.

The United Kingdom’s economy has been the hardest-hit in Europe and shrank by 10 per cent in 2020 – the sharpest one-year fall since the Great Frost of 1709.

While new forecasts suggest the economy will bounce back faster than originally anticipated, in five years’ time it will still be 3 per cent smaller than expected had the pandemic not occurred, the budget showed.

Unemployment is expected to peak at 6.5 per cent. However this figure is largely artificial because 11.2 million jobs have been supported by the government’s furlough scheme which covers 80 per cent of wages provided companies keep staff on the books rather than fire them.

The scheme has already cost £53.8 billion and will be extended until September given many businesses are still required to stay closed.

Fixing the budget while not damaging the already fragile economy is a tricky economic balancing act and politically fraught given a raft of promises Johnson made at the December 2019 election.

The Office for Budget Responsibility said Sunak’s tax rises would lift the UK’s total tax burden to the highest level since the 1960s.

“Over half of this increase is as a result of a 6 percentage point increase in the corporation tax rate to 25 per cent,” the agency said.

To offset the corporate tax rises, Sunak announced a super-charged version of the Morrison government’s asset write-off scheme, where businesses will be able to reduce their tax bill by 130 per cent of the cost of new investments for the next two years.

The £25 billion measure is designed to lift sluggish investment and productivity rates, and minimise any backlash from Tory MPs opposed to higher taxes on big businesses.

“Under existing rules, a construction firm buying £10 million of new equipment can reduce their taxable income in the year they invest by just £2.6 million pounds,” Sunak said. “With the super deduction they can now reduce it by £13 million pounds.

“We’ve never tried this before in our country.” Sunak claimed the measure could boost business investment by 10 per cent.

The scheme significantly underpins the government’s expectations for a big surge in economic growth once restrictions are lifted.

Coronavirus restrictions have hit the British economy hard.Credit:AP

Britain’s debt-to-GDP ratio, which is expected to peak at 97.1 per cent, is more than double Australia’s forecast peak of 43.8 per cent.

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