On Monday, we saw George Osborne announce that he would be looking to reduce Corporation tax rates, possibly to 15% (we don’t know when) to encourage businesses to stay in or move to the UK. This is clearly an effort to stabilise the economy from what I suspect he thinks will be turbulent times. He has also abandoned his fiscal policy of removing the current account deficit by 2020.
Mark Carney of the Bank of England has indicated that interest rates are now likely to fall further. At the same time the Bank of England has relaxed the amount that banks have to retain as a buffer, potentially releasing billions onto the market place, available to stimulate the economy at a time when most people may be thinking of reducing their spending.
Yesterday, Stephen Crabb indicated that he would consider the Government issuing more bonds, effectively borrowing to invest in the country’s infrastructure, a rather left-wing policy.
All three – George Osborne, Mark Carney and Stephen Crabb, all coming from different angles see a need to stimulate the economy.
What has this to do with tax, you might ask? Quite simply a growing economy leads to increasing tax yields, more jobs – therefore reducing unemployment – and the consequential benefit costs. It also leads to confidence, and spending follows as a result. In short, it keeps everything circulating. Without growth we see a shrinking economy, reduced tax yields and an increase in government spending, widening the already enormous government debt. The £350 million a week (or whatever the actual figure is!) could easily be swallowed up in propping up current spending.
What if the economy does shrink, where does the government get its money from, particularly if it doesn’t want to borrow? I think the answer is quite simply taxation. There may be a need, by reduced taxation, to stimulate corporations to move or stay in the U.K. to protect jobs and output, but the only way I see of plugging any fiscal deficit that may arise out of Brexit is to increase taxation elsewhere.
By far the largest contributors to the Government coffers are Income Tax, National Insurance Contributions, and VAT. My colleague David Fiddy has already referred to the relaxation of the restrictions to VAT, so we might see a widening of the net there. For income tax, by far the greatest yield comes from the ordinary man in the street who pays basic rate tax. One wonders if we could see an increase here, as well as in employees National Insurance Contributions. Possibly stopping the increase in personal allowances temporarily. Reductions in Capital Gains Taxes might be reversed and whilst fuel costs are low, petroleum Revenue Tax might be increased.
Of course this is all conjecture and increasing direct taxation itself might slow the economy and that might point to any adjustments to tax rates being directed to VAT and other indirect taxes. Times are certain to be turbulent and economic stability will be essential. I, for one, do not envy the Chancellor in setting future budgets.