Written by Robert Lee
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This article was first published in Briefings for Britain and we republish it with their kind permission
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Internal UK Treasury plans to raise taxes to reduce Covid-19 related debt levels have recently received influential support. These proposals must be resisted. The country instead needs to reduce future debt burdens over time by raising productivity and the sustainable economic growth rate. Such ‘austerity’ tax increases, would achieve the opposite. The country needs radical tax reforms to boost the supply side of the economy, not counter-productive tax rises.
In early May a leaked Treasury paper showed that a series of tax increases and spending cuts was being contemplated in order to reduce the high deficits and debt levels consequent on the Covid-19 pandemic. In the paper the Treasury forecast a “base case” scenario in which the 2020/21 UK fiscal deficit rises to £337bn – from a forecast £55bn pre-crisis – and a “worst case” scenario where the deficit is £516bn. In the base case tax rises and spending cuts of £25-30bn are recommended, while in the worst case the package would “need” to be £80-90bn. On the menu of austerity choices were: an increase of 1p in the basic income tax rate (£5bn), an end to the pensions triple lock (£8bn), a two year public sector pay freeze (£6.5bn), and unspecified rises in VAT, national insurance and company tax. New taxes such as an income tax surcharge to fund the NHS or taxes on property and wealth were also contemplated.
The proposals received a lot of criticism and the PM and Chancellor seemed to signal that such measures would not receive their backing. However, in recent days a number of influential organisations and individuals – including the OBR (Office of Budget Responsibility), the IFS (Institute for Fiscal Studies), the Resolution Foundation, the Chairman of the Parliamentary Treasury Committee, and former Chancellor Norman Lamont – have either advocated or forecast significant tax increases. The Labour Party is pushing the introduction of wealth taxes. The Chancellor has now initiated a review of capital gains tax – could this be a precursor to raising revenue raising measures?
Where to start with this madness? In the first instance I retain my relative optimism about the UK’s recovery prospects. The Treasury also produces a “best case” scenario –in my view the most probable – which sees the economy recovering most of its lost ground within 12 months. In that case the 20/21 deficit is “only” £207bn, and even the hair-shirt Treasury sees no need for renewed austerity in this case. However, the Treasury’s base case scenario envisages the massive drops in GDP of the first half of 2020 are only followed by a weak and hesitant recovery. Business and consumer confidence would then remain very low. Swingeing tax rises and spending cuts in those circumstances could only have the effect of weakening the recovery or pushing us back into recession. The impact on the deficit and on future debt growth would then be entirely counter-productive. In the worst case scenario, in which the economy hardly recovers at all, much bigger tax increases and spending cuts are stipulated. This defies all common sense and economic logic, not to mention political reality.
The Treasury seems to have failed to notice that we live in a world of very low interest rates, one in which the dynamics of public debt have become very different. The most authoritative exponent of this more benign attitude to public debt is Oliver Blanchard, former IMF Chief Economist. He argues that in conditions where interest rates on government debt are lower than the nominal economic growth rate – as they are now – public sector debt expansion may have little or no fiscal cost, where fiscal cost is defined as the need to raise taxes in future because debt raised now cannot be rolled over. As a long time fiscal “hawk” I have been fully converted to this view (as set out in a previous July 2019 Briefings paper called “The Case for Fiscal Expansion post-Brexit”). Many fiscal conservatives have been similarly converted, but the memo has not been received in the Treasury’s mouldering Ivory Tower.
This is not to argue that there are no longer term dangers or threats arising from very large deficits and/or high and rising government debt to GDP ratios. However, these threats and dangers are not germane in current UK circumstances. The interest rate on ten year UK government bonds is currently a miniscule 0.12%, having fallen during the lockdown from an already incredibly low rate of 0.75%. Yields on UK bonds with maturities in the 1-7 year range have actually gone slightly negative. The nominal GDP growth rate will be very negative in Q2, but as UK broad money supply growth is rising sharply and the BoE is committed to a substantial bond buying programme the nominal GDP growth rate should return to trend in the medium to long term.
(To be continued with Part 2 in tomorrow’s issue)
I am afraid that getting back to where we were in 2019 is IMPOSSIBLE without serious blue sky thinking. Once a company goes bust, That’s it!. Gone. ! To resurrect it costs far far far, more than the balance sheet shows, and makes the squeals from the Unions patheticly moronic.( Unions are important , but, not as they are, they’re rubbish and merely destructive. ) )Balance sheets ignore failed or unsuccessful blind alleys, or even unnoticed world changers.
All British taxes at present are ENVY taxes. And as such, designed to stifle. Not help.
But you know they won’t do the correct thing. Germany, Holland, Scandinavia Will make less and fewer foolish, self serving errors. But ours will be awe inspiring .
So Robert Lee I agree
May I suggest this theory:-
Tax the use natural of resources ” ( Cheer up the “Save the planet pratts ) like coal ( Think of the effect on China etc.)
Beef up pollution taxes. e.g. :- Tax engine size and types.REDUCE personal and initiative taxes such as profits, IP,
and so on
? Why not start now.
“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
David Copperfield (1850)
This axiom applies to nations too! Britain used to be a major creditor nation to the world. Now we a major debt-ridden nation.
Remedying this may take rather more than a little tinkering around with tax.
I’d say it is just common sense that if people have money they will spend it. That increases demand. Increased demand will call forth increased supply. So the economy ‘grows’. Isn’t that a good thing that we want?
On the other hand it has always been the case that we want a positive balance of trade, by which I mean more EXPORTED and less IMPORTED. Added to that any Nation State needs to be as near as possible self sufficient in food, energy and defence.
Past treasury/EU and/or Cameron/May AUSTERITY has been shown to slow the economy down by reducing demand. Obviously a BAD thing.
One useful austerity measure (already suggested) freeze treasury civil servants pay. Otherwise, as the article says austerity measures are madness.
GOOD SET OF COMMENTS PAULINE, with total agreement from me ! ….. Have you ever thought of moving to 11 Downing Street ? – If you haven’t, then someone with a firm grasp of basic facts should !
Thank you Mike Maunder. But no thanks. I ‘escaped’ from living in Surrey and working in civil service, London, in 1968. For many years since I had to fight tooth and nail against ‘Come back Home Pauline’.
Still fighting various battles, but that one at least has gone.
If you volunteer for the job, I’ll vote for you!
TAXATION is as bent as a hairpin ! – Ordinary folk on ordinary income are the worse off, due to PAYE in an automated system, allows tax to be taken every payday and without argument ! – The better off will find ways of side stepping tax, and self employed folk have it off to a fine art ! – The seriously well off have the advantage of the Accountants to keep it all legal, and money can be moved in a few minutes to tax advantage locations – Then there are the businesses that trade in several Nations, and are with their own opinion as to where tax is paid. – Governments, (certainly ours), let them do this, because if they don’t, this Nation might have to face the loss of that business from our country ! – Sales tax is a little better as it is common to all, though for cash in hand, ‘discounts’ are possible for some ! ….. I remember Sir Humphrey telling Hacker that the Revenue pitch for as much as they think they can get away with, and not what a programme will cost ! – That was then, but now we are in a very deep financial hole, and it is said by the Chancellor that we will not be going back to Austerity ! – I guess they are searching for another word that means the same ! – Of course, if Corbyn’s Labour was in power, we would answer the problem by continued borrowing, and so pass the problem to our children, our grandchildren, our great ………. !
Say it again Mike! When income tax was first introduced just before World War One it only applied to the top one or two per cent of incomes, or near enough to make no difference. Now the people paying the biggest portion of their income in income tax are those on the lowest incomes. It’s unbelievable.
This is an example Ralph, of give and inch and a mile is taken ! – Always hit those least able to afford it, and it is agreed and done by all political Parties. – The Lords still control the Serfs !
Our future hangs on whether a vaccine becomes available.
Nothing else matters.
Without it, the economy goes into free fall.
The more money available to government, whether it be from tax or from borrowings, the more government will spend, willy-nilly. If irresponsible people (we should name them) have borrowed from willing lenders such as central and international banks, by what right do those people then turn to taxpayers and say: ‘and you pay the bill – including interest – afterwards’. Adding, silently, and if you don’t pay our (tax) demands, we shall hurt you.’ In any other walk of life that would merit at the very least a court appearance and, probably, a gaol sentence. (That’s why we need to identify and name the culprits who demand and spend).
You don’t need to look back far in history to see the effect of over-taxing.
In the 70s, GB top rate tax went to 97.5 pct (19/6 in the pound).
Several things happened.
– High earners left the country. By the way this has reappeared recently with top French singers and actors leaving France.
(Two fingers – one tattooed with Reasonable Tax, and the other No Tax).
– The Black Economy. (Black for taxation, not for you and me). Repaint the whole house guv’ – 5,000 quid if it goes through the books, or 3,000 if cash in hand. It can be seen going on today – bartering, window washing, decorating, gardening and more.
(It is action of the ”Laffer Curve” – at tax saturation people don’t pay it).
My suggestions:
– Leave tax as it is and reduce luxury tax (now called vat) to five percent (the lowest the common market allows).
Take a good long look at the public sector. Freeze pay for say ten years. Sacking them would just transfer the wages bill to a social security bill.
– Obviously, stop bringing freeloaders on the social system into the country. (Drain on meagre resources – shut the doors).
– Forget raising any new taxes or hiking existing taxes. (Laffer plus making a fragile workforce redundant – e.g. business rates).
Rather than set more ‘tax sails’, give the crew a good meal, batten down the hatches and ride out the coming storm.
Sounds good to me Biscotte.
And to me Lisa.