Government makes high stakes bet on the economy – Birmingham Post article 11.11.2021

The late Vivian Nicholson became famous when she told the media that she would “spend, spend, spend” after her husband won £152,319 (equivalent to more than £3 million today) on the football pools in 1961.

And she did exactly that until the fortune dwindled to nothing.

One can’t compare the bubbly blonde with Chancellor Rishi Sunak, nor am I suggesting the country is on the brink of bankruptcy, but the recent Budget had a slight whiff of Viv’s heady lifestyle.

How come?

The national debt was £2.2 trillion at the end of the financial year in March, equivalent to 103.6 per cent of gross domestic product (GDP).

It continues to rise – government borrowing in 2021/22 is expected to be £183 billion.

Looming large in the background is the green agenda and the commitment to net zero.

Modelling by the National Grid of four “different pathways” there, ranging from “Steady Progression” to “Leading the Way”, indicates the cost could be £3.2 trillion by 2050.

Yet Whitehall departments have just been given another £150 billion, taking public spending to levels not seen since the 1970s.

An extra £5.9 billion to help the NHS tackle the backlog of non-emergency procedures and modernise digital technology; £5.7 billion to transform transport networks outside London; £4.7 billion for schools; £24 billion for housing; a £1.4 billion fund to attract overseas investment into the UK; increased spending on sports and youth clubs; support for families and children; crime prevention … and on and on.

In part, this is being paid for in higher taxes, rises in corporation tax and National Insurance, with Britain facing the highest tax burden since the 1950s, according to the Office of Budget Responsibility (OBR).

You can see why the Chancellor is taking such a gamble – seen as a necessary stimulus in the wake of Brexit and the pandemic.

To steady nerves he has introduced two new fiscal rules whereby net debt as a percentage of GDP should fall, and the government should only borrow to fund investment, with everyday spending met by taxation.

Nevertheless, some unforeseen economic shock could easily throw his calculations off course.

No wonder then one of the Daily Mail’s headlines read “We’re on a Hazardous, High-spending Journey – Get Ready To Reach for the Lifebelts”.

Meanwhile the Resolution Foundation said the average household would pay £3,000 more in taxes as a result of the Budget. Combined with higher inflation and weak earnings growth, this would lead to a “flat recovery in household living standards” as the pandemic recedes.

Paul Johnson, director of the Institute of Fiscal Studies, said the real-term damage to household incomes was unprecedented in modern history, with weaker economic growth and higher inflation to blame. “High inflation, rising taxes and poor growth, still undermined more by Brexit than by the pandemic, will see real living standards barely rising and, for many, falling over the next year.”

Also, many more people will be sucked into paying higher rates of income tax.

So, any crumbs of comfort for investors?

Isa allowances, capital gains tax, pension tax relief, and inheritance tax were either untouched or frozen.

As announced in September, the rate of dividend tax will increase by 1.25 percentage points from April 2022 to 8.75 per cent for basic-rate taxpayers, 33.75 per cent for higher-rate taxpayers, and 39.35 per cent for additional-rate taxpayers. The annual dividend allowance – the amount of dividend income you do not have to pay tax on – will remain at £2,000.

Ways to mitigate dividend tax, including investing through ISAs and pensions, will be options to consider.

Viv ended up penniless. Make sure you don’t!