George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Will tax increases pay for Boris’ spending spree?

At the time of writing this (I use that phrase carefully as more announcements may emerge at any time) Prime Minister Boris Johnson has announced a wide range of policy initiatives with a cost likely to exceed £28bn:

Proposal Cost estimate, £bn
Raise higher tax band (11 June 2019)   10
Further cut in corporation tax rate (11 June 2019) 3.1
Cash for schools (29 June 2019) 4.6 (1)
Full-fibre broadband (16 June 2019) 3 (2)
20,000 more police officers (26 July 2019) 1.1
Money for hospitals (4 August 2019) 1.8
Increase to Brexit no-deal preparations (28 July 2019) 2.1
10,000 extra prison places (11 August 2019) 2.5
Cement position of UK as science superpower (8 August 2019) ? (3)
Investment in artificial intelligence (8 August 2019) 0.25
Total 28.95

(1) depending on what is meant by reversing previous cuts to school funding
(2) assuming 10 per cent of the total cost of £30bn is met from public funds
(3) no estimates available

How would this all be paid for? 

Broadly, Prime Minister Boris Johnson and Chancellor of the Exchequer Sajid Javid have two choices: higher borrowing or tax increases. 

Of course, in reality the choice would be more nuanced. But what if, in the interests of keeping borrowing to a minimum, the Chancellor chose to increase taxes? At the end of a long period of austerity, and faced with Brexit uncertainty, people might feel that they deserve some fiscal treats so tax increases might on the face of it seem likely. Then there’s the question of the promised tax reductions included in the Prime Minister’s pledges. We don’t have to look far back in history to find plentiful examples of Chancellors raising taxes from one group of the population to pay for tax cuts elsewhere. So let’s stick with the idea that these pledges will be paid for through taxes. What would a Chancellor have to do to raise £30bn?

Here the number £5bn comes in handy. As a rough and ready guide, £5bn – give or take the odd £200m – is the amount the Treasury would collect or give away with a 1 per cent change in the basic rate of income tax. Or a 1 per cent change in the rate of VAT. And, by sheer coincidence, a one per cent change to all employee and employer national insurance contributions.

So £30bn might be raised through a 2 per cent increase in NIC along with a 2 per cent increase in VAT, both accompanied by a two per cent increase in the basic rate of income tax. A terrifying prospect, but one which illustrates the huge cost of what is being proposed.

Of course, the funding for these proposals is likely to be split between borrowing and taxation. But it’s extremely unlikely that Sajiv Javid’s first Budget will be a give-away. The real question, therefore, is who will pay more tax to help fund these proposals, and on what?

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