George Bull

Written by: George Bull

George Bull

Senior Tax Partner

When will the UK reach ‘peak tax’?

As fiscal shopping lists go, the Chancellor's seems singularly devoid of treats. Borrowing must be brought under control. Public expenditure has to return to pre-pandemic levels. Political upsets over cutting universal credit have to be avoided. The adequacy of the health and social care levy should be demonstrated before it is tested at the ballot boxes. Schools need many billions of pounds to pay for catch-up teaching, as does clearing the logjam in the courts. Then there are the railways – putting the existing lines on a firmer financial footing won’t come cheap. Similarly, funding the changes necessary to meet the UK’s climate change net-zero commitments, not to mention upgrading the National Grid and securing energy supplies for businesses, homes and transport, all demand their share of the public purse. What possible scope can there be for tax cuts within two or three years? Cutting the major taxes such as income tax, NIC, VAT and corporation tax doesn’t look like a plausible option.

With the Chancellor renowned for his fiscal discipline, it was no surprise to hear him tell the Conservative party conference that excessive public borrowing is immoral. More surprising, perhaps, was the suggestion that there might indeed be scope for future tax cuts. So perhaps rumours of a pact between the Prime Minister and the Chancellor have some foundation.

What might those foundations be? We think there are several. Two call for particular mention. 

First, GDP is recovering more quickly than expected following the pandemic. At the end of July 2021, GDP was just 2.1 per cent below its pre-coronavirus level. Forecasts that COVID-19 will make a permanent 3 per cent dent in UK economic activity look excessively gloomy. If that’s the case, then the GDP rebound will help the Chancellor simultaneously fund extra public expenditure while helping restore the sustainability of public finances.

That brings me to the second major factor. Public sector net debt as a percentage of GDP has fallen 1.4 per cent since its peak in June 2021. It’s too early to be confident about the longer-term trend line but this does suggest that higher levels of public expenditure, on the back of improving GDP, would not be incompatible with sustainable borrowing.

Beyond that there have been signals from the Prime Minister that, instead of increasing benefits, he will consider raising the national minimum wage so that people in work take home more money. That neatly shifts the cost from the Exchequer to employers, although it does not of course address the needs of the unemployed and those at the margins.

Other comments from Mr Johnson imply continuing nervousness about the effectiveness of the health and social care levy. Suggestions that local authorities should increase council tax to fund improved social care will, to the extent that local authorities follow this lead, spread the political burden. That burden will of course continue to be shouldered by taxpayers in one form or another.

What might be called ‘stealth tax’ increases may also help the Chancellor. Making tax digital for income tax (deferred to April 2024 at the earliest) is likely to help HMRC close the tax gap to the tune of several billion pounds a year. So too will any windfall from the OECD global initiative to curtail tax avoidance by multinational companies. Other administrative changes such as the contentious possibility of changing the UK tax year end could also bring a fiscal windfall without imposing new taxes. We can expect the Chancellor to be alert to these opportunities. 

On Budget day, he also has the opportunity to set out his views on the reform of capital gains tax, the possibility of a wealth tax and other tax changes which may be popular with everybody except the people who have to pay them. However, the protective shield of the GDP recovery and the reduction in borrowing may allow the Chancellor to reinforce his image as fiscally disciplined without having to impose significant new taxes.

On the spending side, there are also opportunities. For example, curtailing HS2 might allow a reallocation of funds which more than paid for sorting out the railways.

Pulling all these threads together, the Chancellor may have more scope for 2023 tax cuts than initially appears to be the case. Who knows, by the end of 2021 we might even find that the UK has reached ‘peak tax’. However, the Chancellor must be careful not to overstate suggestions of 2023 tax cuts. For one thing, events may turn against him. For another, expectations which appear almost certain tend to be priced out and forgotten before they are delivered.

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