Following the Chancellor's Spring Statement speech yesterday (23 March) Head of Tax, John Endacott provided his insights into the key issues: What the Spring Statement tells…
Ahead of today’s Budget, the Treasury Committee of MPs published an eagerly awaited report on ‘Tax after coronavirus’. It provides useful context for the Chancellor’s statement and will be of interest to all those contemplating the outlook for tax policy in the UK.
The headline conclusion is that tax reform is needed to address the UK’s unsustainable public finances. However, the cross-party committee unanimously states that: “Now is not the time for tax rises or fiscal consolidation, but significant fiscal measures, including revenue raising, will probably be needed in the future.”
In terms of what those revenue raising measures should be, the Treasury Committee says:
- the government should prioritise reforming stamp duty land tax
- a moderate increase in corporation tax could raise revenue without damaging growth
The MPs also note that raising tax revenue swiftly and on a large enough scale to repair the damage caused to the public finances by coronavirus “is likely to require higher contributions from one or more of income tax, national insurance and VAT”.
The committee notes that the Conservative Party’s ‘tax lock’ manifesto commitment “will come under significant pressure”. None of this should come as a surprise.
As others have already pointed out, the commitment not to increase the rate of income tax still gives the Chancellor scope to raise revenue by adjusting or freezing income tax thresholds, which have risen in recent years to allow people to keep more of their income before they start paying tax or move into the higher rate band.
To support businesses, the committee also recommends that the government should introduce temporary three-year loss carry-back for trading losses and increase investment incentives for businesses.
As a prelude to the Budget, the Treasury Committee report confirms that the nation is now in a very tricky position. The fiscal impact of the pandemic has exacerbated the long-term unsustainability of the public finances, which were already under pressure due to projected rising age-related spending.
Rishi Sunak will be mindful of the need to address this, but risks undermining the economic recovery by raising taxes too soon.
Regardless of whether the debt created by the Bank of England’s Quantitative Easing programme is cancelled, if interest rates rise significantly then the additional interest cost on government borrowing is likely to dwarf any tax rises.
Interest rate rises due to inflation, caused by servicing our debt by printing money, will have a far bigger impact than any tax rises. If interest rates increase by 1% this adds £25bn to the UK’s annual deficit, or the equivalent of adding 8% to corporation tax.
There are global inflation concerns and this is pushing up the outlook for interest rates. The US stimulus package (and those of other countries) are likely to be inflationary (to at least some extent), so there isn’t much under the UK’s control.
The way to solve the debt burden is to grow the economy. However, fast growth in the economy is likely to be inflationary and so could be counter-productive for the public finances if it leads to rising interest rates.
What we need is sustained growth in the economy over many years that is not inflationary. The problem there is likely to be labour skills shortages and insufficient business investment. So, I suspect we are heading back to post-war “stop go”.
We are expecting more detail on the government’s longer-term taxation strategy to be published on March 23.
For more Budget 2021 commentary, see our live blog here.