Public finances 'can't be fixed after Covid just by taxing wealthy'

Huge £44billion hole in public finances after coronavirus crisis cannot be filled solely by taxing the wealthy, economists warn

  • Economists have warned that taxes are set to rise in medium term after Covid
  • UK GDP has plunged due to impact of lockdown with government debt soaring
  • Income tax. national insurance and VAT could need to rise substantially in future 

The huge hole in the public finances from coronanavirus cannot be filled solely by taxing the wealthy, economists have warned.

Ordinary Britons face rises in income tax, national insurance and VAT to fill the huge hole in the public finances after coronavirus, according to a panel of respected experts.

The scale of the revenue needed due to lost growth and huge bailouts could be as much as two per cent of national income – roughly £44billion. 

However, senior economists and academics told the Treasury Select Committee yesterday that Chancellor Rishi Sunak did not need to act immediately, despite swirling speculation over hikes to fuel duty and corporation tax in the Autumn Budget.  

There was broad agreement that there should be no rush to pay down the Government debt, which topped £2trillion last month for the first time since the 1960s.

Paul Johnson, Director at the Institute for Fiscal Studies (IFS) said although the size of the hole in the finances remained to be seen, without spending cuts it could be 2 per cent of national income in he medium term

The coronavirus crisis has dealt a shattering blow to the UK economy – with uncertainty over how fast it will recover

But experts from the Institute for Government, Institute for Fiscal Studies (IFS), Resolution Foundation (RF) and Institute of Economic Affairs (IEA) agreed that the ratio of tax to income in the UK has not peaked compared with other countries.

Paul Johnson, Director at the Institute for Fiscal Studies (IFS) said although the size of the hole in the finances remained to be seen, without spending cuts it would mean a ‘fairly substantial increase – that might be 2 per cent of national income, for example’.

That was likely to require rises in income tax, national insurance contributions and VAT.

He said: ‘I would expect in the medium run at least increases in those taxes simply because that’s where significant amounts of income comes from.’

The IFS economist added that a two or three percent increase of the basic rate of tax of 20 per cent ‘is not going to do any significant economic damage’.

But his preference was to VAT changes, pointing out the huge extra tax take from the rise in 2011 from 17.5 per cent to 20 per cent.

He added that indirect taxes, like stamp duty or council tax, could be changed, but would have less impact than tackling the key direct ones.

Dr Gemma Tetlow, chief economist at the institute for Government said tax rises were needed but the Government should avoid targeting national insurance contributions as it runs the risk of a greater divide between employees and freelancers.

She explained: ‘That’s been easier to do because people in their minds draw some connection between national insurance contributions and the benefits you get back when in reality the system doesn’t really work like that.’

The economist also explained that ministers should be thinking about ‘broadening the base of these taxes’ rather than just raising them.

But she warned that problems like the so-called pasty tax backlash must be avoided through proper targeting.

Rishi Sunak, pictured in Whitehall yesterday, is delivering his Autumn Budget later this year – but tax rises are unlikely to be implemented for some time after that to avoid making the damage from the crisis worse

Philip Booth, senior academic fellow at the IEA said we should avoid the high inflation of the 1970s, when the prevailing view was that inflation was a good way of pushing down the real value of the debts.

Along with others, he also called on the Government to be more willing to talk through policies and ideas with a broader number of people.

He explained: ‘At least Gordon Brown did have a clear political agenda regardless of whether you believed in it or not and was quite transparent in the ways he went about formulating tax policy and having wide discussion of it beforehand.

‘But since 2011 you’ve just had taxation policy basically invented on the hoof… we’ve seen successive chancellors… just playing to the gallery, developing taxation policy on the hoof without really putting it to any clear underlying principles whatsoever.’

Mike Brewer, deputy chief executive and chief economist at the RF agreed that more taxes would need to be raised, but added: ‘We should not expect to see taxes rising in the next year.’

He explained the Government should also make plans for longer term issues, particularly around social care in an ageing population.

Mr Brewer said: ‘We either need substantial tax rises or you need to provide less good health, social care and pensions, or the population will have to pay more themselves – that’s what the OBR (Office for Budget Responsibility) are telling us.’

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