COMMENT The guiding lights of Rishi Sunak’s Budget are recovery and rebalancing. Not so much tax and spend, more spend and then tax.
The chancellor believes government should only spend when it must, and then not more than it has to – for example, to hold society together during a pandemic. It should then get back to its core function: incentivising and enabling private capital to deliver the recovery, as well as balancing the books.
Like any good chancellor Sunak is an optimist. He believes locked-down consumers, nursing their animal spirits and accumulating savings, are now eager to burst out of their front doors like millions of recovery Rambos.
He hopes these unleashed shoppers, tonto for spending, will unite with a torrent of pent-up investment from cash-rich big business, galvanised by his Super Deduction. The Super Deduction, only available for spending until April 2023, aims to add to this critical spending mass by incentivising businesses to invest early – or miss out on a buffer against 2023’s corporation tax rise. Sunak hopes this confidence and cash will then cascade down through society. If he’s right, the economy will rebound like a squash ball out of a bazooka.
The Budget that didn’t bark
Sunak believes the 2023 economy will be strong enough to take his tax rises – and do still more. That’s the vision behind his spend-short, tax-long Budget. We should welcome the chancellor’s extended support to see us to the promised rebound shore: furlough, rates and VAT relief and modest (but not unhelpful) restart grants. But, in many other ways, this is a Budget that didn’t bark, and of big ideas postponed.
Take business rates. The Covid crisis shows the current business rates model is broken. It’s based on out-of-date rental values, is too sticky to respond to market changes (even cataclysmic ones) and is disproportionately borne by retailers in physical shops. However – key fact – it raises £25bn a year.
The Treasury is reviewing the business rates regime and will hopefully reach a view in the autumn. The answer is probably not a simple online tax. We need to encourage retailers to become omni-channel operators, not tax that innovation. The government must find a balanced answer combining a more market responsive form of rates, perhaps some online tax and – grasp that electoral nettle! – a fresh look at taxing residential property and fairer council taxes. Cue segue to the housing market. House prices are the UK’s national religion. We used to crowd into churches, now we click on Rightmove. Online house hunting is the banana bread of lockdowns 2 and 3. Every government knows high house prices make voters happier and more inclined to spend. That’s why the chancellor extended the stamp duty holiday. In a land of few booming industries the housing market is king and queen.
The stamp duty holiday has ignited a year-long national hunt for homes with gardens, far away from cities. Over the last year the average UK house price is up £10k at £231,068. The UK stamp duty holiday has cost the Treasury £4.9bn and buyers are paying the whole tax saving to sellers – and then some. That’s the thing with quasi-religious frenzies, they’re inexplicable.
The future of Darlington
But if the short-term effect of this buying craze is to push house prices up and first-time buyers out (something the mortgage guarantee scheme is intended to address), it could have a much more profound long-term impact. We may be seeing the birth of a new pattern for living in Britain: in towns, not cities; in houses, not flats; commuting by logging on, not getting on massively expensive trains. Indeed, universal free high-speed broadband might be a better use of government money than spending billions on such pre-Covid-world physical infrastructure.
The government should capture this migration’s momentum, and use it to galvanise its levelling up agenda. For example, it could declare some left-behind areas stamp duty free zones, incentivise people to move to them from wealthy cities (bringing money and consumer demand) and then incentivise the creation of businesses to service them.
The working from home revolution means they could live, work and spend in Darlington and have their hub office in Birmingham. Using the WFH revolution in this way, fits with the government’s aim to move 22,000 civil servants out of London by 2030, and would have a much more dramatic impact on regional inequality.
Time is on Sunak’s side. He has support in place for the hopefully final phase of severe anti-Covid restrictions, and has signalled his commitment to early fiscal discipline. The government is ahead in the polls, its pandemic missteps forgotten in the euphoria of high-speed vaccine rollout. There is also plenty of time to get the recovery under way before the next general election. Sunak himself is only 40, and widely respected for his ability (Dominic Cummings called him “intellectually supple”). Time will bring its opportunities.
The chancellor will now prepare a recovery strategy and budget for the autumn. As he does so, it would be good to see him and his advisers bring forward fully elaborated strategies for, among many other things, business rates, property taxes, the housing crisis – including social and council housing – and levelling up. This Budget was a pragmatic and prudent one, but it was only the first step on recovery road.
Bruce Dear is head of London real estate and Paul Beausang is head of real estate tax at Eversheds Sutherland
Photo: StudioCanal/Shutterstock
