Unless the next government rips up the fiscal rules it’s going to have to raise taxes, so it pays to think about where the extra money might actually come from, says Tim Sarson
Last September I wrote about how our Government and its peers around the world are running out of money as they face ever growing public spending but limited new sources of taxation. I studiously avoided suggesting where the Chancellor might find some tax to plug the gap.
As we inch closer to the general election the think tanks are falling over themselves to drum home this point. Last week the National Institute of Economic and Social Research (NIESR) said that unless the next government rips up the fiscal rules, something neither party wants to do, it will be forced to raise taxes. The Institute of Fiscal Studies has been making this point regularly for months: we can’t have European public services with American levels of tax. And now the government has decided to make it an election issue, with the Chancellor Jeremy Hunt speaking last week at a podium emblazoned with “Labour’s Tax Rises”.
So perhaps it’s time I come off the fence and indulge in a bit of speculation. What follows is not a recommendation. But if tax rises are coming it pays to a think about where they realistically might come from.
Any politician grappling with increasing taxes, whether that be increasing existing taxes or introducing new ones, must weigh up a few factors. Unless the tax is simply a political gimmick, it should bring in enough cash to make a difference. It mustn’t inhibit economic activity so much that it ends up costing the exchequer more than it brings in. It should ideally be easy to administer. But above all, it shouldn’t annoy the electorate too much.
With that in mind my policy team have been crunching the numbers from HMRC’s own tables and considering the options. Where might the taxman look next?
First stop are those politically attractive taxes that hit small cohorts of people who either don’t vote or are too small in number to sway an election. The electorate might tell pollsters that they support tax rises to pay for better public services; what they mean is that they support tax rises on other people, ideally ones they don’t like.
The trouble is targeted taxes that only hit the very rich or the very niche tend to produce slim pickings. A 1p increase in the additional rate paid by the very highest earners would net by HMRC’s reckoning a mere £157m a year on average over the period they look at. By contrast a 1p rise in the basic rate, which isn’t going to happen, would get them a cool £6.9bn annually. As for raising the higher Capital Gains Tax rate, the modellers can’t decide whether that would raise or actually lower tax take. The larger pots in this category, oil and gas windfall taxes and the bank levy, have already been raided.
Then there are stealth taxes. Policymakers like them because whilst they affect more people, they don’t make the headlines. This Government’s freezing of income tax thresholds has been one such example, and a very successful one at that. But they’ve been rumbled on that one now, and falling inflation makes the policy less lucrative.
Beyond threshold freezes the options are more limited. Would many notice a 1p increase in Insurance Premium Tax (£560m) or Air Passenger Duty (£150m)? Maybe not, but consumption taxes can stir up hornets nests out of proportion to the money at stake. No more so than the granddaddy of them all. The fuel duty freeze is estimated to cost £15bn over the next five years. Fuel duties, levied at the pump, are supposed to rise every year. That’s what the Treasury forecasts always show, but that annual rise keeps being cancelled. Why? Because it’s become taboo to unfreeze it. And anyway, relying on revenue from something you’re committed to phasing out might not be very sensible.
I’m afraid it’s time to address the big workhorses of the tax system: VAT, Corporation Tax (CT) and Payroll Taxes.
Let’s assume no increases to headline income tax or employee’s National Insurance (NI) rates given the likely political fallout. And no rise in CT because it’s already gone up from 19 to 25 per cent. That leaves employer’s NI and VAT.
Our standard rate of VAT is 3 per cent lower than Ireland’s; just a 1 per cent rise in the rate would raise £8.7bn a year. Our employers NI rate is several percentage points lower than Germany and many of our European neighbours. A 1 per cent rise would raise £8.4bn a year.
Just the facts. If you think a future government is going to mount a serious raid through the taxation system, then these are the areas to look out for.