Photo by Jordhan Madec on Unsplash
It may seem courageous if not foolhardy to predict that there will be no further substantial tax rises announced between now and the general election in 2023 or 2024. Given the backdrop of the record government spending on coronavirus, most commentators have indicated that there will be substantial further tax rises. I beg to disagree. This is for a combination of fiscal, economic and political reasons.
First of all, the fiscal. The Chancellor of the Exchequer has already announced major tax rises in three areas. First the freeze on thresholds, second the corporation tax increase and third the national insurance rise. He is therefore increased the tax take of two of the three revenue raisers for the Exchequer namely income tax and national insurance. The third major revenue raiser, VAT is probably considered as too toxic an area to raise further unless there is an emergency.
One should note that inflation will play a large part in determining how much these tax rises will raise. If inflation does reach 4% or more, then the effect of the freezes on tax thresholds will bring considerable extra revenues into the Exchequer. This is not just a feature of fiscal drag but also there will be additional VAT revenues as prices increase. The projections on how much the tax rises would yield is predicated on a considerably lower level of inflation than that which is now projected. Commentators have pointed out that inflation may lead to higher costs in servicing higher debt but as most UK debt is secured on a long-term basis the downside for the public finances is limited.
In terms of public spending where a three-year settlement will be announced on budget day the government has already taken some tough and controversial decisions. The cumulative effect of the cut in foreign aid, the ending of the £20 uplift to universal credit and the ending of furlough and SEISS as well as the pay freeze for most of the Public Sector will reduce the strain on the public finances. The economy is also doing its part to reduce net public spending. The large wage rises in certain sectors reduce universal credit claims. Moreover, as unemployment is back below 5% the demands in this area are less than anticipated.
The government has also rolled back some of the temporary reliefs given such as VAT on hospitality, which went up to 12.5% on the 1st of October and the reduction in business rate relief. This all points to public finances that will be substantially stronger than forecast as the economy rebounds from the covid lockdowns and restrictions.
Finally, there is the politics of taxation. The conservative party is undoubtedly uncomfortable with presiding over the highest tax burden as a proportion of GDP in 70 years. Indeed, there is an argument that some of the tax rises were announced in order to make public spending savings seen as a better alternative. If certain members of the government felt that they could spend more without any tax consequences the recent tax announcements have disabused them of this. However many MP’s have made it clear that there should be no more substantial tax rises. The Government’s policy is to balance the finances such that revenue expenditure is covered by taxation. That still leaves borrowing for investments and infrastructure outside this framework.
Finally, there was a view put that raising taxes was “unconservative”. However, those will longer memories will recall the 1981 budget when in the teeth of a recession and defying 364 economists Sir Geoffrey Howe raised taxes. Norman Lamont in 1993 also raised taxes in a landmark budget. Sir Geoffrey Howe’s budget was with hindsight seen as a triumph which laid the foundations for the domination of conservative economic theories in the 1980s. By contrast Norman Lamont’s budget in 1993 was seen as a major contributory factor to the Conservative’s landslide defeat in 1997. Time will tell how the tax rises of 2021 will be viewed.
