Tax increases will be needed across the board for Britain’s highest and lowest earners to bring down record levels of government debt amassed during the coronavirus crisis, leading economists have warned.
Sending a message to the chancellor, Rishi Sunak, as he explores possible options for raising taxes at the autumn budget, experts from four of the country’s leading economic thinktanks said any significant tax changes should not be introduced until a sustainable recovery has taken hold.
However, they warned taxes would then need to rise for high and low earners alike in response to record levels of government debt. Speaking to MPs on the Treasury select committee, Paul Johnson, the director of the Institute for Fiscal Studies, said income tax, national insurance or VAT would need to rise to have any real impact on the public finances.
“If you are looking to raise taxes, the likelihood is it’s going to have to be a fairly substantial increase,” he added.
Johnson said the 20% basic rate of income tax could be increased by two or three percentage points and that the 40% higher rate could also go up. Any such change would break the Conservatives’ “triple tax lock” promise not to increase income tax, national insurance or VAT for five years. Boris Johnson’s government also went ahead with a plan to cut national insurance in April.
Sunak is considering ways to raise taxes as the government responds to Covid-19 and lasting damage to the economy from the pandemic which have driven up public borrowing, adding to the national debt.
The economists on Tuesday said broader changes to taxation would be needed to address the scale of the economic shock inflicted by Covid-19.
Gemma Tetlow, chief economist at the Institute for Government, and Philip Booth, a senior fellow at the free-market Institute of Economic Affairs, told the Treasury committee that Sunak should consider raising VAT and expanding the range of goods and services covered by the sales tax.
Although admitting such changes are politically difficult, as shown by George Osborne’s attempt to charge VAT on pasties in 2012, Tetlow said: “Broadening the base of VAT would be a good thing to do. Other countries do manage to do it, but clearly it is a very good thing to do.”
Booth said VAT could be applied to fuel, transport and food, and that many EU countries had broader tax bases than in the UK. “People start to pay tax at lower levels of income, and higher rates of tax lower down the income scale,” he said of those countries.
With Britain in the deepest recession since modern records began and facing a difficult winter with rising cases of coronavirus infections, the economists warned Sunak against raising taxes this year. However, they said taxes would need to rise in future as pressures mount on the public finances from an ageing population.
“We have to raise taxes somehow, so it’s really a question of finding the one that do least damage to the economy,” said Mike Brewer, deputy chief executive of the Resolution Foundation. He said one option for consideration was a wealth tax or a “solidarity tax” that would apply to people or businesses that have benefited from shifts in the economy to more remote working during lockdown.
Booth added: “I wouldn’t get too wound up about the increase in debt caused by the Covid crisis, thats not my big concern. One of the reasons to accumulate government debt is to deal with emergencies. My big concern is the next 30-40 years.”