Rishi Sunak assessing ways to cover UK’s huge COVID-19 debt
- Rishi Sunak keen on raising the online sales tax to reduce COVID-19 debt
- Chancellor refuses wealth tax hike as it is “un-Conservative”
- British businesses urge Rishi Sunak to provide additional financial aid
- British pound to euro (GBP/EUR) exchange rate trading flat
British consumers could be slapped with higher prices for consumer goods sold online after Financial Secretary to the Treasury, Jesse Norman, said Chancellor Rishi Sunak is considering raising the online sales tax.
While UK Prime Minister Boris Johnson has talked about implementing a low-tax Singapore-style system, the Chancellor could introduce a new levy on online sales to help combat the government’s ballooning GBP 400BN COVID-19 debt.
UK Government borrowing has soared to a record GBP 2.1TN due to the furlough scheme’s extension and other financial aid measures to support businesses and livelihoods through the Coronavirus pandemic
Financial Secretary, Jesse Norman said the Treasury had only “touched upon the idea of an increase in online sales tax” and that it is still under discussion, but Rishi Sunak is keen on the proposition.
Under the proposed plan, an additional 2% charge will be applied to all goods purchased online, which could potentially bring in an additional GBP 2BN a year for the UK economy.
There has also been speculation that the new shoppers’ levy will be accompanied by extra charges on shipping costs to reduce the COVID-19 debt.
However, several critics have warned that this could hurt sales as online retailers will more than likely increase the prices of goods for consumers.
Hike in online sales tax will penalise consumers
Online retailers, such as Amazon, have benefited from the pandemic, as the closure of traditional retail stores has increased traffic on the web.
Internet sellers have also made considerable savings by avoiding paying rent or maintenance prices like high street retailers.
But with UK finances are in dire straits due to the pandemic, Rishi Sunak is looking to plug the COVID black hole in the government’s books with an increase in online sales tax.
However, some retail leaders are conflicted about Downing Street raising the online sales tax, warning that the increased costs will be transferred to consumers.
Other critics have said the decision would seriously penalise working-class and low-income families, who would feel the brunt of the move.
Former Chief Global Economist at Capital Economics, Julian Jessop said: “It’s daft to think an online sales tax could save the High Street without raising prices and reducing consumer choice.”
While changes to wealth and property tax have been put forward for consideration, Jesse Norman and Chancellor Rishi Sunak have rejected the ideas.
According to Bloomberg, former UK PM and Labour Party leader, Tony Blair, has also warned the Treasury against raising wealth taxes.
Rishi Sunak dismisses wealth tax hike
Even though the UK’s COVID-19 debt could surpass GBP 400BN for the 2020-21 financial year, Chancellor Rishi Sunak has dismissed proposals for a wealth tax hike.
At the end of last year, the Wealth Tax Commission (WTC), a group set up by the London School of Economics and Warwick University, produced a study that revealed a 5% tax on assets over GBP 500,000, or GBP 1M per household, would raise GBP 260BN for the UK economy.
The WTC, comprised of tax experts and economists, said raising taxes on the wealthy members of society is a fairer way to narrow the fiscal deficit than introducing measures that will affect the wider population, including those on low incomes.
However, the Chancellor hit back at suggestions, stating it would be “un-Conservative” to raise wealth tax as it goes against Tory’s values.
Mr Sunak cannot raise income tax, national insurance or VAT due to the commitments outlined in the Tory manifesto.
With limited options, the Chancellor risks facing a clash with businesses as he is believed to be mulling over increasing corporation tax, which is currently 19%.
According to recent forecasts, the Treasury could raise GBP 3.4BN just by increasing corporation tax by a percentage point.
However, his refusal to raise wealth tax has triggered some uproar amongst industry professionals and given way to increased speculation over a capital gains tax hike.
Quilter tax and financial planning expert, Rachael Griffin, says: “That said, there’s no hiding from the fact that the UK’s finances are in a perilous position.”
British businesses have urged the Chancellor to extend the furlough scheme and provide additional financial aid to support firms through the spring.
British businesses call for more financial aid
The Confederation of British Industry (CBI) has asked the government to unleash a further GBP 7.6BN in emergency financial aid for businesses, stressing that firms cannot wait until the March budget to receive support.
The Treasury has also ready provided GBP 280BN in fiscal stimulus measures to support the pandemic-hit economy, comprising loans, grants, and the furlough scheme, which has been a lifeline for many throughout the coronavirus crisis.
All of these measures have driven the UK’s public sector deficit to a peacetime record high. Still, companies and stakeholders, including those from within the Conservative party, are urging Sunak to ramp up stimulus measures.
Industry professionals are urging Rishi Sunak to extend the furlough scheme until June 2021. Similar proposals have also been made for the Coronavirus Job Retention Scheme, business rates relief, and VAT deferrals. The CBI argues that sectors worst-affected by the COVID pandemic will need additional support as they could take longer to recover.
However, additional stimulus measures would increase the government’s COVID-19 debt and take the wind out of economic recovery, which will likely prove damaging for pound Sterling (GBP).
GBP outlook remains uncertain due to COVID-19 debt
Last week, Bank of England (BoE) Governor Andrew Bailey boosted confidence in the UK’s recovery outlook after dismissing the possibility of policymakers implementing negative rates any time soon.
However, optimism surrounding interest rates appears to be fading, partly due to uncertainty over the economic hardships the UK economy could face due to the government’s ballooning debt and Brexit.
While pound Sterling (GBP) exchange rates have managed to recover from this morning’s slump, they remain relatively subdued heading into the North American session.
The British pound to euro (GBP/EUR) exchange rate is currently depressed at around EUR 1.123, albeit the EU’s laggard COVID vaccine rollout could trigger headwinds for the single currency.
While the UK government has been criticised for its handling of the pandemic, the country has one of the world’s most successful COVID-19 vaccination programmes.
Suppose Britain continues to inoculate the population at this accelerated pace and achieves its target to vaccinate 15 million people by mid-February. In that case, GBP/EUR could edge higher, as this should encourage Prime Minister Boris Johnson to lift lockdown restrictions on a more permanent basis.