In the last few months, it always felt a little awkward to be debating how we would pay for the lockdown when the country was in crisis and death rates were surging.
We are not necessarily out of the woods in terms of the virus and many individuals and families will be dealing with grief and long term physical effects for a long time, even if the UK escapes a substantial second wave.
However, we do need to start focusing on the economic situation. My view currently is that advised clients will likely face tax rises or at least less generous reliefs simply because there are so few other options.
That is partly because of the scale of the economic challenges and the likelihood that the economy and the public finances will be in crisis mode for a significant period of time.
We are currently spending on variously grants, loans, furlough (a massive cost), crisis specific spending and normal state spending at a time when government revenue has fallen away dramatically.
We have 7.5 million employees on what is effectively government paid-for income support. I watch some of the economic debates in relation to this and think a lot of people including commentators who should know better, simply do not grasp the scale of this.
Indeed, Chancellor Rishi Sunak, who is the stand out cabinet performer of the crisis, may face the greatest dilemma since the war – more than Denis Healy during his brush with the IMF in the 1970s and perhaps more than Sir Stafford Cripps in the years following the Second World War.
Certainly, the central dilemma is more acute. Sunak has to balance coming off furlough and thus cutting his multi-billion bill for it with the risk that he drives up unemployment which brings its own benefit bills. Once you account for housing benefit and the fact that millions of unemployed would not be paying tax, then you see the horrendous situation confronting him.
The decision to push furlough out to October is therefore more understandable than you might think but the pressure to begin to unwind it from August will also be intense. There are a serious lack of details in the statements to date about what happens after July. Part-furlough sounds very complicated.
I do think the Treasury briefers made a significant blunder first in discussing weaning employees off of furlough, then discussing weaning employers off it.
Try telling a restauranteur or his or her staff that they have been infantilised and need to come off their mother’s milk again.
But the term weaned may accurately and more diplomatically apply to the UK economy as a whole.
Eventually, the Chancellor will also have to think how to pay down the debt but just cutting things may not cut it. There’s no slack at local authority level. Care can surely no longer be the poor relative.
There is huge opposition to austerity both in terms of social costs but also a great deal of debate about its effectiveness in such an economic climate. If it dampened economic growth, then it could prove counter-productive, even if it was politically possible.
Yet there surely has to be some ceiling on borrowing in terms of the annual deficit and the national debt overall.
Of course, for now, some investors are prepared to pay the British government for the privilege of loaning it money for three years. The question remains how long such a situation will continue. One assumes that in three years’ time it will cost more borrow. Even our highly skilled Debt Management Office could be tested. Could there even be a UK debt crisis – like the one we were so worried about in 2009 but which didn’t materialise.
There is a lot of debate about managing the debt like war debt i.e. paying it off over the next several decades, and of central bank interventions that could almost magic debt away. it is difficult to say how easy that would be in a modern context and with mutterings of discontent from at least one credit agency Fitch.
Another question for the Chancellor is whether to raise taxes – specifically income and related taxes or VAT. I think the issue is all these cases, remains the likely fragility of the economy.
We do know that the Treasury is already set on applying IR35 to the private sector in the hope of garnering extra revenue.
This is despite a highly critical House of Lords economic and finance bill sub-committee report entitled Off-payroll working: treating people fairly.
To quote the committee chair Lord Forsythe: “The rules were deferred for a year because of the current crisis, but how prepared will businesses recovering from the crisis be to take on this extra burden on next year? The Government needs to think this through very carefully. We call on the Government to announce in six months’ time whether it will go ahead with reintroducing these proposals.
“Contractors already concerned by these uncertain times now have the added worries of paying more employment taxes and having their fees cut by clients making additional National Insurance Contributions. Also concerning is the number of companies getting rid of contractors in anticipation of the implementation of these new rules.”
Even with the Government pressing ahead, the noble Lord has hit the nail on the head when it comes to increasing taxes on business, employers, employees and employment. I would say VAT isn’t exactly an easy way out either especially with the likely carnage on the high street.
I think all this adds up to the Treasury looking again at tax reliefs and even wealth taxes.
That could mean – finally – significant restrictions on higher rate pension relief – though any Treasury move in this area will require detailed work rather than an overnight decision.
Or it may mean some sort of wealth tax, conventionally on property or occasionally on investment portfolios or share ownership.
Rightly or wrongly, it may be seen as a way to generate revenue without undermining a fragile economy, though it would put surely Mr Sunak’s popularity to the test.
I think advisers may need to tell clients to brace for this although that is a topic for another time.
Octo Members explainers28 January 2021
Debating the crucial issues27 December 2021
Progressive Planning Event 8th September Agenda23 August 2022