UK set for higher taxes as virus slams state coffers

Britons face the prospect of higher taxes as the government looks to claw back vast sums spent during the pandemic – but the move risks harming economic recovery, according to experts.

While finance minister Rishi Sunak on Wednesday, September 2, vowed that there would not be “a horror show of tax rises with no end in sight,” he stressed that the government “will need to do some difficult things.”

Analysts said this was a clear signal that tax rises were on the way.

Reports suggest that Sunak is mulling hikes to raise between £20 billion and £30 billion ($26 to $39 billion, 22 to 33 billion euros).

This could be in the form of increasing income and corporation taxes, analysts said.

Helen Miller, deputy director at the Institute of Fiscal Studies, warned against acting too soon.

“Now is not the time to raise taxes,” she said in response to Sunak’s tax-raising signals. 

“The economy is still weak and the recovery only just starting,” Miller said, adding that the government should use the current climate to reform the British tax system.

“It’s hard to think of a tax that couldn’t be substantially improved. This offers a significant prize. 

“Put simply, it is the quality as well as the quantity of any tax rises that determine how economically harmful they are,” Miller added.

The government has in fact cut tax during the pandemic, handing temporary reductions to the level of value-added tax on food, accommodation, and attractions.

It has lifted also the threshold at which stamp duty is due on home purchases, helping property buyers and the construction sector.

Sunak, whose official title is chancellor of the exchequer, warned however that the state cannot “simply borrow” its way out of the current financial hole.

British government debt has exceeded £2 trillion for the first time following massive state borrowing as the coronavirus pandemic pushed the United Kingdom economy into a record recession.

That is equivalent to more than 100% of the country’s annual gross domestic product, or total economic output, for the first time since 1961. 

The right-wing Conservative government, led by Prime Minister Boris Johnson, has launched multibillion-pound packages, including paying private-sector wages, to tackle the pandemic’s fallout.

‘Stable footing’

“All the talk is of using higher taxes to put the public finances on a more stable footing,” said Paul Dales, chief UK economist at Capital Economics research group, adding that Sunak faced a tough balancing act.

The chancellor “needs to say that he will raise taxes in order to maintain the political perception that the Tory party is better at managing the public finances than the [main opposition] Labour party.

“But on the other hand, he needs to say that taxes will remain low to keep the Tory party’s low-tax reputation – and also low taxes are one of the government’s post-Brexit aims,” he told Agence France-Presse on Thursday, September 3. – Rappler.com