The U.K. is still in the grip of the coronavirus crisis, but political speculation is already rife on how the country will manage the ballooning debt it has run up to fight the pandemic.
With the nation still fresh from almost a decade of austerity, there’s little appetite for spending cuts to shrink a deficit on course to reach 400 billion pounds ($547 billion) this year. That puts potential tax rises in focus as Chancellor of the Exchequer Rishi Sunak prepares to set out plans in his March 3 budget to start restoring the public finances.
Fiscal Toll
Britain is set for one of the largest budget deficits in the OECD this year
Source: Organisation for Economic Co-operation and Development
Note: Negative = budget deficit
While most economists agree now isn’t the moment for fiscal tightening, the U.K. media has been rife with speculation that the government will try to swell its tax take, which would usually total almost 800 billion pounds. That’s been fueled by Sunak’s insistence, repeated on Friday, that he will repair the nation’s battered public finances over time.
“Once our economy begins to recover, we should look to return the public finances to a more sustainable footing,” he said, after data showing that borrowing has ballooned again.
Here’s a look at the tax levers Sunak can and can’t pull, should he decide he needs to start taking action.
Sacred Cows
A major problem for Sunak is that the Conservatives’ 2019 manifesto ruled out increases in the U.K.’s three biggest taxes -- income tax, National Insurance and Value Added Tax. Between them they raise over 500 billion pounds in a normal year. VAT takings in particular will have been shriveled by the crisis, and government measures to tackle it.
The Big Three
Income tax, VAT and NICs together account for 60% of total U.K. revenue
Source: Office for Budget Responsibility, Treasury calculations
Note: estimates published on March 11, therefore do not reflect impact of lockdown and stimulus measures on tax receipts
While increasing any of those levies might generate considerable extra revenue, that could prove highly unpopular and even risk hurting consumption once the recovery gets under way. No Chancellor has boosted the basic income tax rate since Labour’s Denis Healey in the 1970s.
Down and Down
Denis Healey was the last British chancellor to increase the basic tax rate
Source: Tolley's Income Tax, Institute for Fiscal Studies
That’s left the government searching for alternatives. A Treasury spokesman said the department doesn’t comment on speculation about tax changes.
Corporation Tax
The Times reported last week that Sunak may hike a levy on businesses first because he sees that as the fairest way to raise significant sums. Corporation tax currently generates around 60 billion pounds a year.
The main rate has fallen from 28% in 2010 to 19% currently. While each percentage point increase would raise more than 3 billion pounds, any move would jar with the government’s priority of making the U.K. an attractive place for business after Brexit.
Business Boost
U.K. company profits were spared the austerity following the 2008 crash
Source: U.K. government
Property Tax
Another idea mooted by the Times was a property tax on homes. That would replace local authority levies that net almost 40 billion pounds, based on 1990s valuations, and stamp duty, which takes a cut on house purchases.
Stamp duty netted the Treasury more than 12 billion pounds in the last fiscal year, but takings are probably vastly reduced by the government’s decision to temporarily exempt the first 500,000 pounds of a transaction.
Combining both taxes would prove unpopular in Tory heartlands, which tend to have higher house prices, and could mean fairly large increases for the southeast of England without raising much money, according to Torsten Bell, chief executive of the Resolution Foundation. Still, such a move may prove popular in northern areas crucial to the Conservative election victory in 2019.
Fuel Duty
The Sun reported last week that a 5-pence ($0.07) increase in fuel duty is being considered -- another move likely to dismay Tory backbenchers. The levy has been frozen at 57.95 pence for a decade.
Light Touch
Gains made on assets attract lower tax rates than income in the U.K.
Source: U.K. government
Note: Capital Gains Tax rates depend on total amount of taxable income
Capital Gains
The Treasury commissioned a review into Capital Gains Tax last year, which found that an increase could theoretically more than double the current take of about 10 billion pounds, even though such an outcome might be elusive in practice.
Proposals included raising rates levied on sales of assets such as property and shares to align with income tax. Other suggestions included lowering the floor above which the tax becomes liable, targeting more stock-based rewards for employees and abolishing relief on share disposals in unlisted companies.
Wealth Tax
A more innovative and potentially hugely controversial option that could seek to address growing U.K. inequality would be a wealth tax.
Last year, the independent Wealth Tax Commission said the U.K. could raise more than 260 billion pounds with an annual charge of 1% lasting five years on individual assets above 500,000 pounds. About 8 million residents would be affected.
Wait and See
Sunak could also decide that it’s too early to raise taxes, choosing to tolerate a higher debt load until the U.K.’s recovery is assured. That tactic was mooted last week by a Treasury minister who suggested hikes could be avoided should the economy stage a strong rebound.
“It’s not absolutely obvious therefore that there may be any future need for consolidation, depending on the view you take for taxes,” Financial Secretary to the Treasury Jesse Norman told the House of Commons Treasury Committee.
Debt Costs
Cheap borrowing means Sunak faces no immediate pressure to cut deficit
Source: Office for National Statistics
Note: Self-imposed government rule requires net interest costs to be less than 6% of primary (non-interest) receipts
That approach, which removes the risk of premature tightening that could choke off growth, could be achievable after Bank of England bond purchases to stimulate the economy drove U.K. debt-servicing costs below pre-pandemic levels, despite the borrowing splurge.
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