The 2020 Spring Budget was the first in more than fourty years as a non-EU member state – but it was not Brexit that defined it. A strange new virus was becoming a major concern, forcing the UK’s new Chancellor Rishi Sunak to implement sweeping measures to shield the economy – leading to it being dubbed ‘the coronavirus budget’. A year on, England is about to take its first tentative steps out of another lockdown, leaving the Chancellor with some tough decisions to make: how to finish tackling Covid, how to secure a recovery, how to fix the public finances.

Mr Sunak – who will deliver the next Budget on Wednesday 3 March against the backdrop of the largest fiscal deficit since World War II – recently said: “We have a responsibility, once the economy recovers, to return to a sustainable fiscal position”, So how might the contents of his red briefcase help the UK achieve this?

Business rates holiday

Businesses in the retail, hospitality and leisure sectors in England have been hit hard by the economic impact of the pandemic. In a bid to soften the blow, they are currently benefitting from a business rates holiday for the 2020/2021 tax year – with similar reliefs in place in Scotland, Wales and Northern Ireland.

The Chancellor – along with the devolved authorities – is under mounting pressure to extend this relief provision, which is due to expire at the end of next month. Businesses in these sectors have suffered a catastrophic loss of income in the past year, causing leading industry groups – including the CBI – to call for the government to extend the business rates holiday before the Budget. This led Boris Johnson to confirm that there will be no announcement on a potential extension until 3 March.

Furlough scheme

Current furlough support for workers and closed businesses is due to run out at the end of the financial year. However, Rishi Sunak is expected to extend the scheme until at least July after Boris Johnson outlined his long-awaited roadmap out of lockdown. The Prime Minister pledged not to “pull the rug out” from under the economy while the lockdown restrictions were being eased – a strong indication that the lifeline will continue.

The need to leave this vital relief measure turned on was highlighted by the latest unemployment reading, which climbed to its highest rate in almost five years in the fourth quarter. The figures showed that 726,000 fewer people are currently in payrolled employment than before the start of the pandemic.

Taxation

Significant tax rises are inevitable at some point as the UK economy emerges from the wreckage caused by the pandemic. However, reports suggest the Conservative government will honour its “triple tax lock” manifesto promise – meaning there will likely be no increase in Income Tax, National Insurance (NI) or VAT just yet. So, how is the government planning on funding its support measures?

The Chancellor is expected to hike corporation tax from 19% to 23% in a bid to raise an extra £12bn in government revenue. Another option that has been filling column inches is a proposal to align Capital Gains Tax with Income Tax rates – which would represent a significant increase across all Income Tax bands.

Speculation is also mounting that the Chancellor is considering handing out tax breaks to UK manufacturers to help aid the post-Covid recovery.

Stamp duty

Will the current six-month stamp duty holiday be extended beyond 31 March? It appears that Mr Sunak set the initial deadline without anticipating a third lockdown, meaning the tax cut could still be required to stimulate the market. Speculation is rife that the Chancellor will extend the holiday, with the nature of the extension still up for debate: some believe it will be extended by six weeks to prevent sales falling through after the 31 March deadline expires; while others have suggested it will only cover homes with offers already in the pipeline.

How will the pound react?

If last year’s Budget is anything to go by, investors will welcome the Chancellor’s financial statement on 3 March. Twelve months ago, the pound was being battered by headwinds caused by the burgeoning pandemic. The Budget offered the currency some solace after Mr Sunak announced a host of targeted policies aimed at helping the UK economy to weather the Covid-19 storm.

This time around, the pound is in fine fettle thanks to the lockdown exit roadmap and the rapid pace of the UK’s vaccination programme – raising hopes of an economic recovery this spring. Combine this with a Budget that aims to boost productivity and economic growth, and the pound will only get stronger. If, however, the Chancellor goes against the grain and announces new tax reforms earlier than expected to balance the books, the pound’s value could suffer.