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Britain's Chancellor of the Exchequer Jeremy Hunt poses with the budget box at Downing Street in London, Britain March 15, 2023.
A new attitude and a new budget: Can the Tories make a comeback?
Weeks after the International Monetary Fund forecast that the UK will be the worst-performing advanced economy this year, British Chancellor Jeremy Hunt on Wednesday handed down a fresh national budget. (Though the independent Office for Budget Responsibility now says that the economy will only contract by 0.2% this year, an improvement on previous forecasts of 1.4%.)
Budgets can have a massive impact on politics. You’ll likely remember that ephemeral PM Liz Truss’ “mini” budget last fall caused the markets to nosedive, leading to her swift resignation.
As the UK grapples with a dire cost-of-living crisis and a sky-high annual inflation rate of 10.1%, Hunt tried to convey that the government will address falling living standards without overspending while also stimulating growth after years of sluggish economic performance. For context, real household disposable income, a key standard-of-living metric, is expected to drop 5.7% between 2022 and 2024.
Indeed, the budget laid out public spending measures opposed by some Tory hardliners, including a £4 billion additional investment in free childcare and an extension until the end of June of a £2,500 annual energy price cap to offset rising energy costs as a result of Russia’s war in Ukraine.
What's more, the Tories will stick to an earlier plan to raise the corporate tax rate by 6 percentage points to 25%, a move unpopular with fiscally conservative Tories. A significant budgetary development is the abolition of limits on the amount workers can build up in their pension funds before paying tax, which is aimed at keeping some professionals in the workforce for longer. There are also some tax breaks offered to businesses to boost investment.
Much of Hunt’s budget focuses on the need to plug a hole in the labor market and boost productivity after years of sluggish growth. Crucially, while the economies of other advanced countries including the US, Canada, Japan, and the EU now exceed their pre-pandemic levels, Britain’s GDP remains stagnant. This trend started after the 2007-2008 financial crisis, and was further exacerbated by the Brexit fallout, which raised trade barriers and created a climate of uncertainty and chaos.
The challenge is now on Labour leader Keir Starmer to recast his party’s opposing message. Love him or hate him, Prime Minister Rishi Sunak, a mild-mannered technocrat who is on a mission to mend relationships around the globe, can hardly be accused of the gross incompetence that plagued his predecessors.
With general elections slated for next year, can Starmer maintain the 20-point advantage Labour currently enjoys after the implosion of the Conservative Party under Boris Johnson – or is this the beginning of the Tories’ comeback?
Democrats scramble for ideas to finance $2T spending bill
Jon Lieber, head of Eurasia Group's coverage of political and policy developments in Washington, shares insights on US politics:
How are Democrats going to finance their $2 trillion spending bill?
Well, I don't know. And the Democrats don't know either. The original idea was to undo a lot of the Trump tax cuts from 2017. This is a very unpopular tax bill that every Democrat voted against, but moderate Senator Kyrsten Sinema told the White House earlier this month that she's against any and all tax rate increases. This takes the top individual income tax rate going up off the table. And it takes the top corporate rate going up off the table. And it probably takes capital gains rates going up off the table. So, now the Democrats are scrambling to backfill that revenue that they can no longer raise through rate increases with other ideas. One of those ideas is a tax on the unrealized gains of billionaires.
This would be a radical departure from how the US taxes income. Typically, it taxes capital gains income when those gains are realized. And the proposal from the Senate Finance Committee would be to tax them on an annual basis based on the appreciation. So, in some cases, you could be taxing somebody on gains they haven't realized and forcing them to pay with money they don't have, forcing them to sell off assets. Unfortunately for Sinema, and Ron Wyden, and other Democrats who support this, moderate Senator Joe Manchin from West Virginia said he's against it. So, they've got to go to other ideas, such as a corporate alternative minimum tax. The US used to have such a tax in place before the Trump tax cuts, but it was repealed because it didn't raise that much revenue, and it was a little confusing and had high compliance burdens.
Now, the Democrats want to bring that back. It would involve taking away some of the deductions and credits that companies use to minimize their tax liability, and would apply to a very narrow group of companies, about 200. If you look at the corporate minimum tax, if you look at the billionaires tax, which would affect about 700 people in this country, you're looking at raising an awful lot of revenue from not a large number of people. And this is a really big problem because you're not going to be able to get all the way to $2 trillion in spending with these somewhat narrow tax increases. This party's a long way from ending though. They probably have weeks, or potentially months of negotiations ahead of them. They'd like to get an announcement this week before the President leaves for his trip to the G20, and the Glasgow Climate Summit. They may get something announced, but the details of that are going to be worked out over a long period of time.
How will the global corporate tax deal impact tech companies?
Marietje Schaake, International Policy Director at Stanford's Cyber Policy Center, Eurasia Group senior advisor and former MEP, discusses trends in big tech, privacy protection and cyberspace:
Will the OECD-brokered global corporate tax deal make a difference?
Well, it should, at least in two years, once it is adopted by the 136 countries that have now agreed to it. Once enforced, a minimum contribution would see approximately $125 billion flowing to public purses where it doesn't today. It would make it harder for countries to be tax havens or to be part of this race to the bottom when it comes to tax rates. It puts a limit on competition between countries but that is still possible. Now, public scrutiny over the corporate sector has intensified over the past years and with a whole host of issues like health care, climate change, and infrastructure begging for better solutions, there is a need for fair taxation that is widely supported, both publicly and now also politically.
Will tech companies finally start paying their fair share?
Well, they would be part of this treaty once it is in place, but in the meantime, there is actually a two-year ban on tax levies. The US negotiated that because if you recall, there were French proposals to tax US tech giants over their European income and profits and those almost led to a trade war between the two allies. So, most likely this OECD tax treaty will go over much more smoothly. Already, the historic agreement by the OECD and G20 countries is a much-needed sign of hope.