Why the Chancellor might raise taxes next month
There’s a Budget coming, which could feature some exciting announcements.
Newly appointed Chancellor Rishi Sunak hit the ground running following the surprise resignation of his predecessor, Sajid Javid.
Not only does Sunak have a lot of catching up to do in his new role, but he also needs to contend with the most significant gap between Budgets in more than 120 years.
Now a pre-Budget analysis from the Institute of Fiscal Studies (IFS), funded by the Economic and Social Research Council, has pointed towards the need for a reasonably austere Budget.
So, might we expect tax rises and a spending freeze when the Chancellor takes to the dispatch box on Wednesday 11th March 2020?
According to the IFS, the current policy borrowing next year could reach £63 billion. This projection is some £23 billion higher than the latest official forecast and sits £19 billion above an earlier estimate for borrowing.
Government borrowing isn’t forecast to fall before 2022/23, which means the Tory manifesto pledge to target current budget balance in three years would not be achieved under current policy.
One option available to the government is to abandon their current fiscal rule. Still, the IFS points out that this would put underlying government debt on a rising path, which is unsustainable in the long term.
The IFS points out that 16 fiscal targets have been announced in the last decade. If the Chancellor ditches the current fiscal target in his Budget next month, it would be the shortest-lived of them all!
Looking at spending, day-to-day public service spending per person is 26% below its 2010 peak, which health is excluded. To return public spending to its real 2010 levels would cost the government £54 billion.
The government has already committed that no departments will see cuts in 2020/21. There are additional commitments to raise spending for the NHS, schools, defence and overseas aid.
These pledges mean the Chancellor will need to find an extra £3 billion by 2023/24, or £6.5 billion to maintain spending on unprotected services as a share of national income.
Even with this extra level of government spending, cuts for means-tested support for low-income families with children would occur.
The IFS points out that investment spending is already high by historical standards. The Conservative manifesto promised to take investment spending to 3% of national income, taking it to an above-average international level.
Turning to taxes, which are already high by historical standards, the IFS explains that taxes are often raised in the first year of a new parliament.
One option open to the Chancellor is to abolish entrepreneurs’ relief for capital gains tax. He might also increase council tax bills for those in more expensive properties.
Back in 2017/18, three-quarters of the £2.3 billion spent on capital gains tax entrepreneurs’ relief were for the benefit of just 5,000 individuals, who saved an average of £350,000 each.
Another option open to the Chancellor is to restrict tax relief on pension contributions; a measure designed to save £11 billion a year. The downside of this measure is targeting those earning £50,000 and above who received a pledge from Prime Minister Boris Johnson before the election that income tax would be cut.
The IFS suggests better measures on pensions include reducing the tax-free cash sum, making employer pension contributions subject to National Insurance contributions, and removing the tax-free status of inherited pension pots.
Paul Johnson, Director at the IFS, said:
“Rishi Sunak’s first Budget could be the most important fiscal event in years. It will set the direction of policy for the next five years. If this new government is going to make radical change to taxes and spending this surely is the time to do it.”
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