Three challenges rishi sunak must address in his first budget | thearticle

Rishi Sunak must wish that he had an easier transition to his new role as Chancellor of the Exchequer. He is now battling with the spread of coronavirus, a stock market collapse, a tumbling

oil price and other financial mayhem. What should he do tomorrow, when he launches his first Budget? Even before the stock market crash this week, he faced a number of headwinds — sluggish

growth in the UK and global economies, and a lack of headroom in the fiscal rules. But the turbulent state of the economy also provides an opportunity for the new Chancellor. It gives him

leeway to take short-term action to stimulate the economy and pave the way for longer-term fiscal reform. There are three areas where the Chancellor could take action without seriously

breaching his fiscal rules and prepare the ground for addressing some of the important long-term challenges facing the UK economy. The first is investment in transport infrastructure, where

the UK has underinvested over several decades. Public investment in road and rail infrastructure has been increased in recent years, but is still below one per cent of GDP. Good transport

infrastructure is an important enabler of regional economic development. We already have large rail projects that will need funding, notably HS2 and Northern Powerhouse Rail. But there are

many smaller schemes that could relieve local transport bottlenecks and congestion, enabling more regionally balanced economic development. Within his fiscal rules, the Chancellor has some

headroom for increasing capital spending — the Institute for Fiscal Studies estimates around £10 billion per annum. He could also announce a temporary increase in the cap on net public

investment to cover the impact on major projects like HS2 and Northern Powerhouse Rail. An increase in the cap from 3 per cent to 3.5 per cent of GDP would give him a further £10-12 billion

headroom in the years ahead. Financial analysts and independent economists are likely to be much more sympathetic to a modest relaxation in the fiscal rules which supports economic growth

through transport investment, than other areas of public expenditure or politically motivated tax cuts. Second, Sunak should have a strong element of his Budget devoted to how the UK will

deal with the challenge of climate change. Meeting this challenge is predominantly about supporting the right behaviour and actions by households and firms. There are many useful and

low-cost measures that Sunak could announce which would not have a large fiscal cost, including enhanced incentives for installing electric car fuelling stations and insulating homes. But

the most important thing he could do, would be to announce the Treasury’s commitment to developing a much clearer and coherent tax and spending strategy to support the UK’s commitment to

becoming a zero-carbon economy. This low-carbon fiscal strategy cannot be conjured up overnight, but the Chancellor can announce that his Treasury team will be working on it and there will

be a major announcement in the autumn Budget later this year. On the tax agenda he should restructure Air Passenger Duty so it more properly reflects the impact of airline travel on climate

change, rather than purely acting as a per passenger levy. In addition, Sunak should announce that the Treasury will review the tax treatment of domestic energy use. In a world where we are

facing a “climate change emergency” does it make sense that we apply a lower rate of VAT to domestic energy use than other products and services? This was a political compromise arrived at

in the early 1990s when Norman Lamont’s attempt to impose full rate VAT on gas and electricity bills failed (and ultimately cost him his job). A separate carbon tax on domestic energy use —

which starts at a low level and then can be increased over time — could be a good way of achieving this. Third, Sunak should signal that he will be a champion of broader tax reform. Even

though the Conservative manifesto rules out serious reform for income tax, national insurance and VAT, there are many areas where he could make his mark. Property taxes rely heavily on

Council Tax, where the valuations were set in the early 1990s and have not kept touch with rising property values. At the same time, taxes on property transactions — stamp duty — have been

ramped up and may be distorting the housing market. Business rate, taxation of pensions and environmental levies are other areas ripe for reform. There may be scope for trimming back tax

reliefs that are no longer justified, such as entrepreneurial relief from Capital Gains Tax. The lesson from previous successful tax reforms, particularly those introduced by Nigel Lawson in

the 1980s, is that a process of consultation is needed to ensure successful implementation. The Chancellor should resist the temptation to “pull a rabbit out of the hat” in his March Budget

if he is intent on delivering major tax reforms. Instead he should prepare the ground for a longer process of reform, starting in his autumn Budget later this year. Sunak may be a lucky

Chancellor, because coronavirus and other issues create a smokescreen for him. But he will ultimately be judged on whether his first Budget provides a solid platform for long-term growth in

the UK economy.