U.K.’s Sunak to Set Out Plans to Restore Finances in Budget

(Bloomberg) -- Chancellor of the Exchequer Rishi Sunak will set out plans in his budget in six weeks’ time to start restoring order to the U.K.’s finances, a person familiar said, with the country on course to posting its biggest peacetime budget deficit.

While the extent of any measures the chancellor will announce on March 3 is dependent on the evolution of the pandemic between now and then, the Treasury wants to have a plan that looks beyond Covid at how to close the deficit, according to the person, who spoke anonymously because no decisions have been taken.

U.K. government borrowing climbed to a record 241 billion pounds ($331 billion) in the first eight months of the fiscal year, reflecting the damage inflicted on the U.K. economy by the coronavirus outbreak. New data is due Friday. Pandemic spending has helped push the national debt above 2 trillion pounds for the first time, emphasizing the challenge Sunak now faces in restoring order to the country’s finances.

The chancellor has publicly called reining in the deficit a “sacred duty” and has hinted at tax rises ahead. At the same time, with the country in a third economically-damaging national lockdown, business groups and economists warn that if he attempts to cut spending or raise taxes too soon, he risks stifling the country’s recovery from its worst recession in 300 years.

Nevertheless, Sunak will address the sustainability of the country’s finances because it marks an important dividing line between his Conservative Party and the opposition Labour Party, according to the person.

Pay Freeze

The Office for Budget Responsibility has predicted the U.K. budget deficit for the full fiscal year will reach 394 billion pounds, or 19% of economic output -- the biggest among major industrial nations.

The chancellor already took some steps to rein in expenditure at a spending review in November, by cutting overseas development aid and freezing the pay of millions of public sector workers.

Sunak has told Tory Members of Parliament in private meetings that demands for more public spending could necessitate spending cuts elsewhere, or tax rises, the Financial Times reported on Thursday. It cited one lawmaker as saying the chancellor wants to wean Tories off “the magic money tree.”

The newspaper also said that Sunak is expected to raise corporation tax from its current rate of 19% in March, with further tax rises due in a second budget in November. The chancellor has scope to lift it to as high as 23%, raising 14 billion pounds a year, and still be below the average rate in developed countries, the paper said.

The Treasury declined to comment on the prospect of tax rises.