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The other election: South Carolina and the battle for the US Senate

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As a first-term congressman from South Carolina, Lindsey Graham stood on the floor of the House of Representatives and attacked what he called the “fog” of Washington.

“People are so detached from reality . . . it really is amazing,” the political newcomer said. He noted his promise to serve no more than a dozen years on Capitol Hill.

That was 25 years ago.

A quarter-century later, a silver-haired Mr Graham is coming to the end of his third six-year term as a US senator. He is among the most senior Republicans in Congress and one of President Donald Trump’s closest allies.

But the 65-year-old is in now in the fight of his political life. He faces a formidable challenge from Democrat Jaime Harrison, a black 44-year-old former congressional aide and lobbyist who has raised $86m for his campaign — more money than any Senate candidate in US history.

With fewer than three weeks to go until election day, statewide polls show a tight race — the last Quinnipiac survey had the two men statistically tied. The same poll showed Mr Trump leading his Democratic opponent Joe Biden by just one point, a stunning set of circumstances in a historically Republican southern state where Mr Graham won re-election six years ago by a nearly 17-point margin.

The Republican party is hoping to rally its base with the confirmation of Amy Coney Barrett as a Supreme Court justice © Win McNamee/POOL/EPA-EFE/Shutterstock

“The fact is that Jaime hopped into this race when nobody said he had a snowball’s chance in hell,” says Trav Robertson, chair of the South Carolina Democratic party. “He has put together a campaign that has put him nationally, and in this state, in the realm of doing what people did not think was possible.”

The fate of Republican senators, such as Mr Graham, is central to the outcome of the November 3 election. Given Mr Biden’s comfortable lead in the polls, many Democrats are starting to grow more confident about winning the White House.

But the success of a Biden administration would also depend on the Democrats winning the Senate. Only then would the new president have a chance to push through legislative priorities on everything from healthcare to climate change to pandemic stimulus without Republican obstruction.

Mr Graham is one of several Republican senators struggling to keep their seats. Martha McSally in Arizona, Cory Gardner in Colorado and Susan Collins in Maine all face tough re-election battles. So do David Perdue in Georgia, Joni Ernst in Iowa and Thom Tillis in North Carolina — all states that Mr Trump won in 2016.

It is a state of affairs that seemed unimaginable just a few months ago. But amid heavy criticism of Mr Trump’s handling of the pandemic, many voters appear to be lining up behind Democratic congressional candidates, too.

The key races 1: Republican women under fire

Iowa 

Republican incumbent Joni Ernst, right, the first female combat veteran elected to the Senate, is trailing Democrat Theresa Greenfield, who runs a local real estate firm, in the polls in the Midwestern state that Mr Trump won by 10 points in 2016.

Maine 

Longtime Republican senator Susan Collins, right, who has always styled herself as a moderate, could lose her seat to Sara Gideon, a Democratic state lawmaker, in part because of her support for Mr Trump’s appointment of Brett Kavanaugh to the Supreme Court.

“When you are looking at trying to win in places like South Carolina and Montana, and Iowa, and Georgia, and North Carolina, it seemed impossible to knock off incumbents . . . if you presumed a normal presidential map in a normal year,” says Matt Bennett, co-founder of the Democratic think-tank Third Way. “But certainly the map is expanding in incredible ways.”

Democrats hold the House of Representatives, but the Republicans currently control the 100-member upper chamber of Congress, with 53 senators. Two senators — Angus King of Maine, and Bernie Sanders of Vermont — are independents but caucus with the Democrats.

Mr Graham’s race in South Carolina is emblematic of the broader issues faced by Republicans across America. On one hand, the party is hoping to rally its base with the confirmation of Amy Coney Barrett as a Supreme Court justice who is opposed to abortion and in favour of gun rights. As chairman of the Senate judiciary committee, Mr Graham has a starring role in that process, with confirming hearings being held this week.

On the other hand, the senator and many of his colleagues are realising that supporting Mr Trump is a double-edged sword. If they curry favour with the president’s most ardent supporters, they risk alienating the moderate Republicans and swing voters who cannot stomach his bombastic rhetoric and are angered by his management of the pandemic.

Mr Harrison believes he can pull off what he describes as a “David and Goliath” story. “We are on the verge of a tremendous upset,” he says.

Lindsey Graham, left, is a frequent defender of Trump, centre, on Fox News, and a regular golfing partner for the president © Jim Lo Scalzo/EPA-EFE

‘Trump is on your side’

Mr Graham is perhaps the most extreme example of a Republican who has changed his tune on the president. In the run-up to the 2016 presidential election, the senator called Mr Trump a “race-baiting, xenophobic, religious bigot”, a “kook” and a “jackass” who was “unfit” to be president.

Today, Mr Graham, a frequent defender of Mr Trump on Fox News and a regular golfing partner for the president at weekends, is working in lockstep with the White House to confirm Ms Barrett.

In South Carolina, Mr Graham has tried to satisfy two different groups. He has a rightwing base that has never liked his record of bipartisanship — along with his close friend, the late Republican senator John McCain, the senator frequently worked with Democrats earlier in his career. But he also needs more moderate Republicans and independents who see his U-turn on Mr Trump as hypocritical at best and unforgivable at worst.

Earlier this month, just hours after the White House revealed that the president had tested positive for Covid-19, Mr Graham was in a hotel ballroom in Myrtle Beach, a seaside golf resort, addressing a conference of current and retired South Carolina police officers. It was only 9am, but the senator said he had already spoken to the president on the phone to wish him well.

“The Republican party has its faults, and Trump can be a handful . . . but he has been right on the things that matter to me, and I hope to you,” Mr Graham told the audience. “Do you have any doubt that Donald Trump is on your side? Do you have any doubt that I am on your side?”

Key races 2: the Deep South

Alabama 

Republicans are likely to pick up a Senate seat in Alabama, where college football coach Tommy Tuberville, right, is challenging incumbent Democrat Doug Jones, who won in a 2017 special election against Roy Moore, who was the subject of sexual misconduct allegations.

Georgia 

Both of Georgia’s US Senate seats are up for grabs, with Democrat Jon Ossoff, left, challenging incumbent Republican David Perdue, second from left, and a simultaneous special election involving two Republicans and one Democrat vying for a vacancy that opened up in 2019 with Johnny Isakson’s resignation. Kelly Loeffler, an Intercontinental Exchange executive, filled the spot but she is being challenged by fellow Republican Doug Collins, bottom right, a vocal Trump ally, and Democrat Raphael Warnock, second from right.

The officers — many of whom said they would never vote for a Democrat after calls by left-leaning activists to “defund the police” during this summer’s Black Lives Matter protests — proved to be a friendly crowd for Mr Graham, giving him a standing ovation.

But the senator did not shy away from acknowledging his ballot box battle, saying he was taking the challenge “seriously”.

“Has anybody seen a commercial of my opponent? If I see one more, I think I am going to vote for him,” Mr Graham quipped, referring to the wall-to-wall television advertisements the Harrison campaign has purchased. “Where the hell is all of this money coming from?”

“Every liberal in the country is supporting my opponent, which means to me I must be doing something right,” he added. “So let’s send a message to Hollywood from South Carolina: You’re welcome to visit, but you’re not going to pick our senator.”

Changing state

South Carolina has long been a Republican stronghold. The last Democrat to win the state in a presidential election was Jimmy Carter in 1976, and he benefited in part from calling the neighbouring state of Georgia home. Republicans currently control all of South Carolina’s statewide offices. Mr Graham is one of two Republican senators from the state. Five of the state’s seven House members are also from the GOP.

The two exceptions are Jim Clyburn, a veteran Democratic congressman whose endorsement helped catapult Mr Biden to his party’s presidential nomination, and Joe Cunningham, a first-term congressman who was part of a wave of Democrats who flipped seats held by Republicans in the 2018 US midterm elections.

The socially conservative and strongly religious state, which was the first to secede from the union in the American Civil War, also maintains a complicated relationship with its slave-trading past. The Confederate battle flag — a symbol often associated with slavery and segregation — was only removed from the State House five years ago, after a white supremacist killed nine black worshippers at Mother Emanuel, a church in Charleston.

“It really is a Republican-dominated state. But it is a state that is changing,” says Gibbs Knotts, a political science professor at the College of Charleston. He pointed to an influx of Democrats from parts of the north-east and Midwest and said Mr Harrison would need to mobilise those voters, as well as the state’s large African-American population, to win in November.

“There is a coalition to be built,” Mr Knotts says. “[Barack] Obama did it nationally; Joe Cunningham did it in the first congressional district. But we have not seen anyone do that statewide in South Carolina in 20 years or so.”

The coronavirus pandemic is likely to be among the topics discussed in Mr Graham’s first re-election debate with Democratic challenger Jaime Harrison © Joshua Boucher/The State/AP

Younger Democrats, many with college degrees, have moved to South Carolina in recent years for jobs in the suburbs of Charlotte, which is just over the state border in North Carolina. Older Democrats, drawn to milder winters and lower taxes, have moved to South Carolina to retire along the Atlantic coast.

For conservatives, the shift has not gone unnoticed. At a local Republican party office in Charleston earlier this month, one man stopped in to collect yard signs advertising for Mr Graham, noting that “unfortunately” he had seen many placards for Mr Harrison in his neighbourhood. “I don’t know what’s going on, but I have a feeling I know what’s going on,” he said to a party volunteer, who nodded in agreement.

“They come down here for the lower taxes and the nice lifestyle, but then they bring their politics with them,” she said. “They turn us into what they left.”

Swamp notes

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South Carolina is one of many southern states where changing demographics, driven in part by economic growth and job opportunities in cities like Charlotte, as well as Atlanta, Georgia, and Austin, Texas, have resulted in an influx of Democratic voters and the possibility that states that were once solidly “red” could shift to the Democrats. Mr Harrison frequently describes his campaign as part of a wider effort to build a “New South”.

But Republican officials maintain South Carolina will stay true to its roots. Drew McKissick, chairman of the state Republican party, contends that even the large sums of money being spent by the Harrison campaign would not be enough to win over a majority of the state’s voters.

“Quite frankly, no matter how much you spend on any campaign, people have to be willing to buy what you are selling. Just ask President [Mike] Bloomberg or President Tom Steyer,” he says, referring to the two billionaires who failed in their Democratic presidential primary bids.

“Jaime is the representative of Democratic party on the ballot,” Mr McKissick said. “Representing the Democratic party comes with a lot of political baggage that is not popular in South Carolina.”

Key races 3: a shift in the Sunbelt

Arizona 

Democrats in this south-western state have pinned their hopes on Mark Kelly, a former astronaut and husband of Gabby Giffords, the congresswoman who narrowly survived an assassination attempt in 2011. Mr Kelly is on course to oust Martha McSally, a former fighter pilot who has struggled to appeal to both Donald Trump’s rightwing base and centrist Republicans.

North Carolina 

Republican Thom Tillis, right, a former management consultant at PwC and IBM, is in the fight of his political life, defending his seat against Democrat Cal Cunningham, a retired military officer who was leading in the polls but whose campaign is reeling from revelations that he had an extramarital affair.

Fundraising gap

The Harrison campaign on Sunday revealed they had raised $57m in the third quarter, the largest sum raised in three months by a Senate candidate in US history. The previous quarterly record was held by Beto O’Rourke, the former Democratic congressman who raised $38m in the final stretch of his effort to oust Ted Cruz in Texas in the 2018 midterms.

Republicans are keen to draw comparisons between Mr Harrison and Mr O’Rourke, who came up short against Mr Cruz despite generating widespread national enthusiasm for his candidacy.

Mr Harrison bristles at Republicans’ suggestions that the bulk of his donations have come from wealthy donors living outside of South Carolina. His campaign says the total of $86m they had raised so far in this election cycle has come from nearly 1m individual donors, with an average donation size of $37. South Carolina has a population of 5.1m.

“This is grassroots. Grandmas, grandpas, aunts, uncles, cousins, donations from all [of South Carolina’s] 46 counties . . . I am proud of that,” Mr Harrison said.

Katon Dawson, former chairman of the South Carolina Republican party, disagrees. “Jaime Harrison doesn’t know these people, he does not have to know them,” Mr Dawson says, adding that he was confident that despite the fundraising gap — Mr Graham’s campaign has not disclosed its third-quarter figures, but had raised nearly $30m at the end of June — the senator would triumph.

Mr Graham has come under fire for going back on his 2016 statement that there should be no vote on Supreme Court nominees in an election year © Stefani Reynolds/Getty

“It will show you that a lot of people don’t like President Trump, nor Lindsey, but that’s OK. We’re going to show how many people do like him,” he says. “Everybody around the country who doesn’t like him, doesn’t matter here. Because guess what? They can’t vote.”

Mr Dawson and other Republicans say Mr Graham’s stewardship of Judge Barrett’s confirmation will only earn him plaudits with South Carolina voters, galvanising conservatives around issues like abortion and gun rights, while reminding those on the fence of his influence in Washington.

Rob Godfrey, a longtime adviser to former South Carolina Republican governor Nikki Haley, says the hearings will provide an “unquantifiable and invaluable” contribution to Mr Graham. “It is pretty easy for people to click away from, or turn the channel on, traditional TV ads,” says “It is a much harder proposition to change every channel when you have got Senator Graham leading the . . . hearings.”

But Mr Harrison says Mr Graham’s handling of the Supreme Court vacancy is just another example of the senator’s flip-flopping.

After Ruth Bader Ginsburg died last month, a video went viral of Mr Graham from four years earlier, when Republicans refused to consider Barack Obama’s Supreme Court nominee, Merrick Garland, during an election year.

In the clip, the senator said: “I want you to use my words against me. If there is a Republican president . . . and a vacancy occurs in the last year of the first term, you can say Lindsey Graham said, ‘let’s let the next president, whoever it might be, make that nomination’.”

The senator swiftly distanced himself from his earlier comments, insisting Republicans press ahead with confirming Judge Barrett, saying: “The rules have changed as far as I’m concerned.”

“This is a guy who cannot keep his word,” Mr Harrison said. “My grandfather taught me, he said a man is only as good as his word. What is Lindsey Graham’s word worth?”

Profile photographs by AP, Getty Images, AFP via Getty Images, Bloomberg and Reuters



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Analysis

Investors lambast Sunak’s plans to raise corporation tax

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Shareholders have hit out at the British government’s plans to raise the UK corporation tax rate and warned it could make the country a less attractive place for investment.

Chancellor Rishi Sunak on Wednesday set out plans to increase the corporation tax rate from 19 to 25 per cent for larger businesses in 2023 — the first time it will have been raised since 1974.

The Treasury estimates the move will raise £17bn in 2025-26, but investors expressed concern because of how it could reduce dividend payments by companies.

Richard Buxton, fund manager at Jupiter, an investment group, said Sunak’s proposed increase in the corporation tax rate amounted to a “sizeable bite” out of businesses’ profits.

“When looking at potential profits over a three to five year time horizon investors will have to factor this in, and it will erode earnings and potential dividend growth,” he added.

“In turn, this may at the margin reduce the attraction of UK equities to both domestic and international investors.”

The UK is one of the world’s most popular financial markets for income-seeking investors.

Tom Stevenson, investment director at Fidelity International, a fund manager, said Sunak’s increase in the corporation tax rate would leave the UK just about competitive “but shareholders in the largest, listed companies that will bear the brunt of the measure will not welcome this”.

David Page, head of macro research at Axa Investment Managers, another investment group, said he expected more countries to raise corporation tax rates like the UK, but added: “Does this make the UK less attractive? At the margins yes.”

Nigel Green, chief executive of deVere Group, a financial adviser, said Sunak’s move “will reduce profit after tax and slash the profit available for dividends. This will not go unnoticed by those looking to invest in the UK”.

Sunak said in his Budget speech in the House of Commons that even after his corporation tax reform, the UK’s headline rate would still be the lowest among G7 nations.

But experts said the UK does not look as competitive internationally on other measures, because it is much less generous than other countries — including France and Germany — in the share of capital spending that companies are allowed to set against taxable profits.

An OECD measure of the effective marginal corporate tax rate — the amount of tax a hypothetical company pays on an extra pound of profit — shows the UK is close to the average among developed economies now, but could have one of the toughest regimes among the international organisation’s member nations after 2023.

“The headline rate is not the only thing that matters . . . Mr Sunak is taking a gamble that raising corporate taxes further up the international pecking order won’t have too terrible an effect on investment,” said Paul Johnson, director of the Institute for Fiscal Studies.

Corporation tax rise will give UK relatively high effective rate. Chart showing Effective marginal corporate tax rate, 2019 (%). With the increase in UK's corporation tax in 2023 it will be behind only Australia, Spain and New Zealand in the OECD with the Effective marginal corporate tax rate

The IFS said the extra revenue stemming from the higher rate of corporation tax would in the long run be less than the government’s £17bn a year estimate.

A higher rate would reduce incentives for companies to make investments that would increase profits in later years, it added.

Sunak said on Wednesday the majority of businesses would avoid the corporation tax reform given a rate of 19 per cent would apply to businesses making profits of less than £50,000 each year.

He added the rise in the corporation tax rate to 25 per cent for larger companies in 2023 will be preceded by a new allowance for capital spending, providing a “super-deduction” of 130 per cent on new plant and machinery. 

Dan Neidle, a partner at the law firm Clifford Chance, said the two year tax break would be a strong incentive for companies to accelerate investments that were in the works, although it was not long enough to generate new capital spending that took time to plan.

Tax campaigners TaxWatch UK also criticised the move, saying it would give a tax break to companies that have thrived during the pandemic, including Amazon.

Analysis by TaxWatch found Amazon Services UK, an entity that provides warehousing and delivery services, would have its corporation tax bill wiped out based on its last reported spending on plant and machinery. Amazon declined to comment.

Several smaller companies announced they would bring forward investments as a result of Sunak’s proposed tax break, although larger businesses including defence manufacturer Meggitt said that it would be more difficult to change long term plans.

Tony Wood, chief executive of Meggitt, said the company made “decisions on where to do [the] engineering effort based on what is right for the decade rather than what is right for the two year timeframe”.

But Gavin Cordwell-Smith, chief executive of Hellens group, which owns a paving slab manufacturer in Sunak’s Richmond constituency, said that “as a direct consequence of the [chancellor’s super deduction] announcement, we have already decided to accelerate our growth plans, including a new production line”.

Chemicals maker Christeyns will also bring forward investment plans — and likely increase them — in three factories, said director Nick Garthwaite. 

Some business leaders expressed concern at how Sunak’s planned tax break would only last two years, and be immediately followed by the increase in the corporation tax rate to 25 per cent.

“The chancellor wants a two year investment boom, but we will then go from feast to famine at a time when the consumer recovery might be tailing off,” said one executive.

Additional reporting by Sylvia Pfeifer in London



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China’s leaders focus on post-Covid economy at annual meeting

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China’s National People’s Congress, the country’s annual rubber-stamp parliament session, will convene on Friday for a meeting set to focus on a problem many other countries wished they had: how to rein in an economy that has rebounded from the coronavirus pandemic.

“There have been intense discussions about monetary and fiscal policy,” said Wang Jun at the China Center for International Economic Exchange, a government think-tank in Beijing. “The primary goal is to stabilise leverage, but if policy [tightening] goes too far too quickly it may have a negative impact on financial markets as well as the real economy.”

The NPC will run for about a week and is typically a forum where previously agreed measures and policy objectives are formally approved. Last year’s session, however, was dominated by Chinese president Xi Jinping’s surprise announcement of a stringent national security law for Hong Kong after the city was rocked by anti-government protests in 2019.

The gathering also provides the biggest stage of the year for Xi to project his unchallenged grip on both the government and the Chinese Communist party as he prepares for an unprecedented third term in power in late 2022.

China’s post-Covid recovery contrasts starkly with the situation in the US, where the pandemic has claimed the lives of more than 500,000 Americans and President Joe Biden is pushing Congress to pass a $1.9tn economic stimulus package.

China annual GDP growth rate 2018-2020

Guo Shuqing, one of China’s most powerful financial regulators, warned this week about the dangers of “extremely loose monetary policies” in the US and other pandemic-wracked economies, saying the measures could cause “too much fluctuation” in Chinese financial markets.

He added that China’s property market was still afflicted by “relatively large bubbles” and suggested lending rates would “rebound” this year. Guo, who heads the banking regulator and is also the most senior party official at China’s central bank, pronounced late last year that the real estate sector was the country’s “greatest grey rhino in terms of financial risk”.

Guo’s comments sparked a sell-off on regional markets, illustrating the difficult balance he and other financial officials must attempt to strike. Stimulus measures rolled out by Chinese president Xi Jinping’s administration early last year helped spur investment but also propelled debt levels in the world’s second-largest economy to about 270 per cent of GDP.

“While the leadership feels confident about the economy’s trajectory, there is still a lot of uncertainty,” said Andrew Polk at Trivium, a Beijing-based consultancy. “Authorities need to find a way to unleash consumption and pick up slack from industrial production and real estate investment.”

Shuang Ding, chief China economist at Standard Chartered in Hong Kong, said Beijing was likely to reduce its budget deficit to 3 per cent of GDP, down from 3.6 per cent last year. But he also forecast the Chinese economy would grow at least 6 per cent year on year, with “substantial room for outperformance”, and create 11m jobs.

“The most pressing economic issues are how to withdraw from last year’s expansionary fiscal policy and how to increase consumption,” said Jia Jinjing, an economics professor at Renmin University in Beijing. “The central deficit budget will be lower than last year but still above 3 per cent. We cannot rely too much on increased debt to spur consumption.”

China retail sales growth

NPC delegates will also formally pass the party’s 14th five-year economic plan, which is focused on achieving “self-reliance” in a number of critical technology sectors as well as ambitious environmental goals, including reaching peak carbon dioxide emissions by 2030 and net-zero emissions by 2060.

The NPC session in 2020 was delayed for almost three months by the pandemic and fixated on the imposition of the national security law on Hong Kong.

This year, it is likely to approve measures that will further reduce the pro-democracy camp’s representation in the city’s legislature. It is also expected to unveil rules consolidating Beijing’s hold on an already pro-establishment “election committee” that chooses Hong Kong’s chief executive.

Dozens of Hong Kong democracy activists, including publisher Jimmy Lai and jailed student leader Joshua Wong, have been charged with alleged offences of the security law. In a speech last month, Xia Baolong, head of the Chinese government office responsible for Hong Kong, singled out Lai and Wong as “extremely vile anti-China elements”.

“There doesn’t seem to be any end to the crackdown,” said Willy Lam, a China politics expert at the Chinese University of Hong Kong. “Xi has made up his mind to snuff out Hong Kong’s opposition movement altogether. For ordinary people, Beijing will insist on ‘patriotic education’ in the schools and media.”

A Chinese academic who advises Beijing on Hong Kong issues said the territory had been “too unbridled” prior to last year’s passage of the national security law. “The central government had no other option,” said the academic, who asked not to be identified. “The Hong Kong opposition overestimated its power.”

Additional reporting by Xinning Liu in Beijing



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Sunak goes big and bold to try to repair the public finances

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Chancellor Rishi Sunak’s Budget was big, bold and broke many longstanding records for the public finances.

At an estimated £355bn, the level of UK government borrowing forecast for 2020-21 is due to be the highest since the second world war, reflecting the severity of the coronavirus crisis. It highlights the sheer scale of emergency state support for companies and households during the Covid-19 pandemic.

The tax rises announced on Wednesday by the Conservative chancellor for the middle of the decade — affecting businesses and individuals — will be the largest since 1993. The increases will raise the UK tax burden to its highest level since Roy Jenkins was the Labour party chancellor in the late 1960s.

Justifying his approach, Sunak told the House of Commons: “Just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

As far as the public finances are concerned, the March 3 Budget will become known as a “give then take” affair that will reshape the relationship between the state and the private sector for many years ahead.

And the figures in the Budget documents confirm the coronavirus crisis has utterly transformed the public finances for the worse.

At the March 2020 Budget, when the UK had little clue about the enormity of the pandemic, the Office for Budget Responsibility thought the government would borrow £55bn in 2020-21.

Sunak, who unveiled a £12bn support plan for the economy in what was his first Budget, has since had to add huge amounts of public spending in 16 major announcements.

On Wednesday, he outlined another £40bn of support, bringing total spending to £344bn, according to the OBR: roughly 16 per cent of gross domestic product, and well above the average of 13.3 per cent among advanced economies.

Chart showing the 16 major announcements since the last Budget have increased coronavirus support

It is this spending, alongside a loss of £90bn of expected tax revenues, that is set to raise the level of government borrowing to the highest level in peacetime.

In 2021-22, the government is still planning to spend £93bn on virus related support, mostly going to the NHS, but with large sums also for continued support for companies and households.

Karen Ward, strategist at JPMorgan Asset Management and a former adviser to Philip Hammond when he was chancellor, said Sunak was wise to keep splashing the cash in the next financial year. “The chancellor has rightly erred on the side of an extension that is potentially too long, rather than one that is too short,” she added.

With the colossal borrowing, underlying UK public debt, excluding temporary Bank of England schemes, is set to jump from a pre-pandemic forecast of 73 per cent of GDP by the middle of this decade to 97 per cent in the latest OBR prediction.

The 24 percentage point rise in the core debt burden is the second large jump in a little over a decade following the fiscal shock associated with the 2007-08 financial crisis. At about 100 per cent of GDP, UK public debt is now at its highest level since the early 1960s, when it was gradually coming down following the second world war.

Chart showing that public debt is set to rise to levels not seen since the early 1960s

This Budget was not just about fiscal support in 2021-22, but also stimulus to power the recovery, according to Richard Hughes, OBR chair. He said Sunak’s £25bn “super-deduction” in corporation tax would “stoke the recovery” and “encourage businesses to bring forward future investment into the next two years”.

But after 2021-22, the giveaways stop, and Sunak becomes the revenue raising chancellor, with very large increases planned in corporation and income taxes.

The moves risk damaging the UK’s international standing. In 2018, the OECD said the UK taxed corporate profits below the rich country average. Britain collected 2.6 per cent of national income through the levy, compared with the OECD average of 3.1 per cent.

By 2025-26, the OBR projections suggest UK corporate taxes will generate revenues above the OECD average, although Hughes said this level was “one [the UK] seldom sustained for very long in the postwar period”.

Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said Sunak’s corporation tax rise was a significant risk. “For all the rhetoric about it leaving the headline rate here below that in other G7 countries, our effective tax rate will be relatively high,” he added.

The tax rises will tackle the high level of borrowing, however, according to the OBR.

It projects the increases will lower the current budget deficit in 2025-26 from £37bn, had Sunak done nothing, to £1bn, almost balancing the government’s books excluding public investment. This is a core ambition of ministers.

Chart showing Rishi Sunak’s spend then tax Budget to balance the books

Some economists thought Sunak should have been more explicit in setting new targets for the public finances.

Hande Kucuk, deputy director of the National Institute of Economic and Social Research, a research organisation, said the Budget needed “a comprehensive fiscal framework to build confidence in a sustained recovery given the significant uncertainty regarding the long-term effects of Covid-19 and Brexit”.

Other economists were more forgiving since there are huge uncertainties hanging over the public finances. The path of the pandemic is perhaps the largest, but Sunak also has to worry about the possibility of increased debt servicing bills if interest rates rise, and whether he can cut spending as he plans when the virus subsides.

Torsten Bell, director of the Resolution Foundation, another think-tank, was sceptical the chancellor would be able to reduce departmental spending.

The Budget documents showed a stealthy £4bn a year cut in spending alongside the tax rises. “He’ll end up spending more than that,” said Bell, adding this would add to pressure to proceed with additional tax rises.

But Sunak is an optimist, and hopes the uncertainty will go in his favour. If the economic recovery is sufficiently rapid, the chancellor will be looking to the OBR to cut its estimate of a 3 per cent long term hit to the economy from coronavirus.

And if that happens in a future Budget, Sunak can look forward to the possibility of tax cuts before the next general election.



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