NEWS & VIEWS
As lockdowns are eased across the world, attention turns to how governments might seek to address the huge bills that have come from trying to combat the effects of the Covid-19 pandemic. Many are speculating about the way in which governments will seek to pay off their debts. In the UK, after a decade of austerity, there is little scope for further public services cuts. Economic growth looks unlikely to come to the rescue of the public finances either.
Even before the pandemic, the UK’s prospects were uncertain due to international trade wars, global economic stagnation and localised fallout from Brexit. As a result, the majority of economists see changes to taxation as the answer, but the potential changes in store for the UK remain a hot topic for discussion.
How could the government raise funds?
There have been a number of suggestions for ways the government could raise tax revenue, including some considered ‘low-hanging fruit’. These include measures such as introducing a capital gains tax charge on former main residences passed on after death, with the exception of cohabiting spouses and civil partners and recognised long-term related carers; equalising the rates on income and capital gains tax; and significantly reducing the annual capital gains tax allowance. Another suggested measure is abolishing higher-rate tax reliefs for pension contributions.
However, the most talked about potential tax is one on wealth. According to data released by the Office for National Statistics, UK households own almost £15 trillion worth of net assets. These include property, savings, investments, private pensions and vehicles, less all outstanding liabilities (for instance, mortgages, loans and credit card debts). A small fraction of that total could cover the forecast fiscal costs of the crisis in their entirety.
What is the government considering?
An emergency budget statement is planned for July 6. However, it is not thought to be a full budget that would incorporate tax changes but rather an outline of the plan for the UK’s economic recovery. A Treasury document leaked on May 5 indicated that a £337 billion budget deficit was now the ‘base case scenario’ for this financial year.
The leaked document also included a number of ways that the government could raise funds to cover the deficit. These include an increase in rates/thresholds in one or more of the broad-based taxes (Income Tax, National Insurance Contributions, VAT, and Corporation Tax). As well as reforming/ending one of the biggest tax reliefs: the pension triple lock guaranteeing the state pension rises each year by the highest of inflation, earnings growth or 2.5%. A two-year freeze on public sector wages, new green taxes or levies targeted towards the NHS or social care are also being considered.
It is estimated that a 1% increase in the basic rate of income tax would raise around £5 billion a year and stopping the pension triple lock would save up to £8 billion a year. The two-year freeze on public sector pay could save up to £6.5 billion by 2023-24.