IN FOCUS6-8 min read

The Budget has been cancelled – but the burden of debt remains

With a second wave of Covid-19 looking likely, Rishi Sunak took the dramatic step of cancelling November’s budget. Immediate tax increases appear to be off the table – but for how long?


The UK’s response to Covid-19 has involved enormous and sustained public spending. This will mean huge deficits in the short term, but also a significant increase in national debt likely to persist for decades.

In the coming months, the Government’s first priority will continue to be on ensuring economic recovery and increasing employment. However, there is growing unease about the longer-term fiscal position. The latest sign came in the Chancellor of the Exchequer's speech to the Conservative party conference in early October, with Rishi Sunak describing strong public finances as a "sacred responsibility to future generations." 

The Office for Budget Responsibility (“OBR”) now predicts this year’s borrowing to reach £370 billion, or up to 23% of national income.This is more than double the borrowing following the financial crisis and close to annual levels of borrowing last experienced in the Second World War.

Looking ahead: public spending vs tax receipts


Source: Office for Budget Responsibility, July 2020

Today's deficit will dramatically increase the UK’s national debt. Higher deficits will continue, albeit to a lesser extent, in coming years, as the UK economy suffers post-Covid “scarring”. Without some form of fiscal tightening, the UK’s public sector debt, which in June reached 99.6% of national income**, is predicted to rise to 200% by the 2040s.

This is roughly twice the level forecast before the pandemic.

What can the Chancellor do in the face of this crisis? As the OBR and others have made clear in recent weeks, there is one obvious answer: more tax.

The Government’s predicament

The Government is in a bind. In 2019 the Conservatives promised that “we will not raise the rate of income tax, VAT or National Insurance”. Yet these are the three primary ways in which meaningful revenues are raised.

HMRC’s total receipts for 2019-20 were £635 billion, of which the biggest contributors by far were income tax (£194 billion), VAT (£130 billion) and NI (£143 billion)***. Corporation tax – paid by businesses – is another big revenue source, at £61 billion.

Contributions of major taxes to the Exchequer

Total tax receipts (2019-20) £635 billion
Of which... Income tax £194 billion
VAT £130 billion
National Insurance contributions £143 billion
Corporation tax £61 billion
Stamp duty land tax £12 billion
Capital gains tax £10 billion
Inheritance tax £5 billion

Source: HMRC, June 2020

The government would probably have few qualms about breaking its manifesto pledge, arguing that it is justified by extreme circumstances. The bigger issue is the impact of tax rises on an economy that is still recovering from the shock of a pandemic.

Recent press reports about possible tax increases have met with vocal opposition from MPs – including those in the Conservative party – who argue that the economy is too fragile too handle tax hikes. This suggests there is still little consensus within the government about which taxes will rise – and when.

Taxing the wealthy

There is, however, growing political consensus in favour of improving social equality, with Boris Johnson stating after last year’s election that “levelling up” would be a priority for his government. In addition to increased spending, “levelling up” could involve raising taxes on the wealthy – and being seen to do so. As well as having political appeal, this would allow the government to show it is serious about tackling the deficit – without the damaging economic consequences of raising taxes paid by a larger number of people.

We think it is likely that we will see higher taxes on capital and inherited wealth in future Budgets. We could also see income tax rise at the upper end as well as a reduction in income tax reliefs, including those applying to pension contributions. The combination could squeeze many higher earners. By contrast, we are unlikely to see higher corporation tax, which would put pressure on companies to reduce costs and, consequently, staffing levels, when the priority of the Government is to protect jobs.

Higher taxes on capital gains and inheritances would also respond to increasing concern that our tax regime favours asset owners over income earners. Tax rates on capital gains are significantly lower than for earned income. Gains on share disposals, for example, attract a top rate of 20% compared to the top rate of 45% on earned income. Equalising these rates would immediately deal with this concern. It would also eliminate any ability to structure assets in a way that favours one tax over another, something the government suggests has been happening for some time.

In July, Chancellor Rishi Sunak ordered a root-and-branch review of capital gains tax, including an examination of “the interactions of how gains are taxed compared to other types of income.” The unequivocal comparison of gains to income in the latter half of this statement indicates a clear grouping of the two in the mind of the Chancellor. We think this paves the way for increases in capital gains tax.

We expect similar principles to apply to inheritance tax. Like capital gains tax, it currently contributes relatively little to HMRC’s total pot. But because it is paid by a small minority of wealthier households, many of whom are Conservative voters, it has political significance – both for those who wish to increase it as well as those who wish to maintain the status quo.

Why we think a “wealth tax” is unlikely

There has been speculation about taxing wealth through the imposition of a wealth tax, applied across an investors’ assets above a defined threshold. We think this unlikely. 

There is evidence from other countries that this tax is difficult to administer, unpopular and unsuccessful in raising meaningful revenues. It may also be a step too far for a Conservative government

However, the success of a wealth tax is generally measured in political terms rather than in revenue; it is a very visible tax on the wealthy. This could be a useful tool at a time when those further down the wealth brackets are struggling to afford higher taxes on their income, which is where any meaningful revenue raising exercise must fall. For example, just a one percentage point increase in the basic rate of income tax would raise £5bn, roughly equivalent to the entire amount raised by IHT every year. A wealth tax cannot be ruled out at some point in the future, but in the near term we expect the Government to focus on using existing taxes to demonstrate its “levelling up” agenda.

How will this affect you and your wealth?

The cancellation of November’s Budget suggests immediate changes to the tax regime are unlikely and gives extra time for planning.

In our view, however, over the medium term you are likely to face significantly higher taxes overall, with increases felt through a range of measures. In some cases this will be higher tax rates, in other cases it will be the loss of exemptions and allowances.

The Government will continue to focus on the economic recovery for now. Addressing the longer-term effects of our enormous deficits will come later. But the need to balance the books, coupled with political motives, will see some tax changes in the years ahead.

Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.

*Office for Budget Responsibility, Fiscal Sustainability Report 2020, July 2020.

**Office for National Statistics, UK Government Debt

***HMRC, June 2020

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


2020 market volatility
In Focus
James Gladstone

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.