The Times - UK (2020-09-05)

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the debt but the borrowing. Against its G7 peers, the UK’s debt will look fairly prudent after Covid. Only Germany will have a better debt ratio, which helps to explain why the chancellor only wants to stabilise debt-to-GDP, expected to level off at about 100 per cent. That would mean running annual borrowing at no more than 2.5 per cent of GDP, about £55 billion, roughly where it was forecast to be for the length of this parliament before the pandemic. In the short term Mr Sunak is expected to unveil more stimulus to bed in the recovery and leave tax rises for later, when the fiscal rules bite. Mike Brewer, deputy director of the Resolution Foundation, said: “If any- thing, the government should be spending more now to support the re-

covery. Because the economy looks weak for a long period, efforts to close that [deficit] should not be happening for a few years yet.” Even if Britain is to live with higher debt, taxes will need to rise for two rea- sons. First, Covid will knock about 1.5 per cent off GDP permanently, the Bank said. That’s about £30 billion of lost output, which translates into £12 billion less tax revenues. Second, unemployment will be higher for longer, which raises welfare costs, and health services, including social care, will need more funding. Paul Johnson, head of the Institute for Fiscal Studies, estimated that taxes may have to rise by about 2 per cent of GDP, equivalent to £40 billion a year. That’s roughly in line with the tax rises

set out in a leaked Treasury document in May. It said: “To fill a gap this size [in the public finances] through tax revenue would be very challenging. To raise fiscally significant amounts, we would either have to increase rates/thresholds in one of the broad-based taxes [income tax, national insurance, VAT and corporation tax] or reform one of the biggest tax reliefs [like pensions tax relief].” With the Tory triple tax lock prevent- ing changes to the big three taxes, speculation is now focused on capital gains tax, corporation tax and fuel duty as well as cuts to pensions tax relief. However, economists are sceptical that the sums needed can be raised from the rich alone. Wealth taxes “will not raise you very large amounts of money,” Mr Johnson told MPs this

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Boris Johnson has appointed Tony Abbott as an adviser to the Board of Trade despite pressure to drop the former Australian prime minister because of allegations of sexism and homophobia. Page 2

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Amazon is investigating its most prolific British product reviewers after allegations that they are profiting from posting thousands of five-star- ratings. The “suspicious behaviour” has been detected in the reviews left on the website of the internet shopping giant by nine out of its top ten contributors, according to the Financial Times. Page 6

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The European Union is demanding a potential veto on Britain’s post-Brexit laws and regulations, senior government officials have claimed. Michel Barnier, the EU’s chief negotiator, is said to be insisting that the government must agree not to implement any change to UK legislation that could distort trade with the bloc without first consulting Brussels. Pages 8-9

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The Spectator has banned the Co-op from advertising in its pages in a row over editorial freedom and trans rights. Andrew Neil, the broadcaster and chairman of the company that owns the publication, accused the group of trying to use its “financial might” to influence the political magazine’s content. Page 11

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The prime minister has rejected calls for airport testing, Boris Johnson saying that airport screening identifies only 7 per cent of asymptomatic cases. A spokesman for Airlines UK, the trade body, said that testing “can play a role in bringing down the quarantine time which is so damaging to us.” Page 14

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Barratt, Persimmon, Taylor Wimpey and Countryside Properties, four of the biggest housebuilders, could face action by the Competition and Markets Authority competition watchdog for allegedly mis-selling leasehold homes. Page 24

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Wall Street fell sharply again after the latest employment figures from the US Labor Department sparked concern about the economy’s recovery from the Covid-19 recession. Page 49

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Pearson, the world’s biggest education publisher, is set to clash with shareholders over a $9 million “golden hello” for Andy Bird, its new boss, and a $240,000 annual allowance for a New York

apartment. Page 49

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Only four boiler room scams were prosecuted by the Financial Conduct Authority, the City regulator, over the past five years despite its warning that people were losing their homes and savings to “sophisticated” frauds. Page 52

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A hold-up in new work caused by the Covid-19 lockdown and disruption in supply chains is slowing work at building sites, the latest survey of purchasing managers in the sector by the Chartered Institute of Procurement and Supply found. Page 53

Need to know

Sunak has to put up taxes

Ben Broadbent, the Bank of England’s deputy governor for monetary policy, had a lesson from history to impart to the government amid this week’s fevered speculation about how to deal with post-Covid debt. “Any long-lasting reduction in government debt had to be achieved by running a tighter fiscal policy,” he said in reference to Britain’s experience after the Napoleonic and First World wars. The lesson from the Second World War was little different. Higher inflation helped to erode debt but Clement Attlee’s Labour government ran the tightest budgets of the past 75 years. Rishi Sunak, the chancellor, may have had such thoughts in mind when he told Tory MPs on Wednesday that taxes would have to rise to correct public finances. It would be nice if Thérèse Coffey, the work and pensions secretary, was right when claiming that cutting taxes increased revenues but that is only the case when taxes are punitively high and growth is strong, neither of which applies to the UK. Growth is certainly the easiest way of fixing the public finances but it cannot be magicked up on demand. Ms Coffey was thinking about corporation tax when she told Times Radio: “People might assume the only way to get tax up is to increase tax rates; actu- ally we have shown in our economic history the opposite.” Revenues did increase as the tax rate was gradually cut after 2010. But those higher revenues reflected generalised global growth just as the lower revenues in 2008 and 2009 after Labour cut corporation tax reflected the recession. One person who disagrees with Ms Coffey is Mr Sunak. In the March budget, he pencilled in a £7 billion annual gain from scrapping a planned 2 percentage point cut in corporation tax. Talk about tax rises has surfaced because the chancellor is preparing the ground for his spending review and budget. These will be framed by the new rules he sets to constrain borrowing and re-establish fiscal credibility after the £370 billion Covid splurge, seven times this year’s borrowing forecast in March. Economists expect the budget rules to be looser than in the past but they cannot be so loose as to be meaningless. That will mean difficult choices, or “difficult things”, as the chancellor put it. Departments must find savings for the spending review or taxes will have to rise in the budget. The urgency is not

Tax and spend: the options

TA X The triple lock Income tax, national insurance and VAT account for two thirds of tax receipts. If substantial new revenue is needed, small changes to the big three would be the easiest and least distortionary approach. A percentage point increase would raise £5.7 billion in income tax, £6.4 billion in national insurance and £7.2 billion in VAT, according to the Institute for Fiscal Studies. But it would mean the Tories breaking their manifesto pledge.

Corporation tax After the big three comes corporation tax. Aligning the UK’s 19 per cent corporation tax with the OECD average of 21.4 would raise about £7 billion.

Wealth tax Raising rates of capital gains tax in line with income tax would raise as much as £20 billion from the rich, according to researchers at Warwick University, but could provoke a change in behaviour and deter investment. A 35 per cent rate would raise about £11 billion.

Self-employed Preferential tax treatment of the self- employed and people who incorporate as businesses costs the state about £15 billion a year, according to Helen Miller at the IFS. Levelling the playing field would deter tax avoidance.

VAT relief The UK zero rates VAT on far more products

than most countries, forgoing £50 billion a year. Many of those reliefs are untouchable, such as the £19 billion forgone on food and the £4.8 billion on the reduced rate on domestic fuel. It is a dangerous area, though. George Osborne was forced into a U-turn on extending VAT to that humblest of meals, cornish pasties, in 2012.

Pension tax relief Another tax on the rich. Currently higher rate tax payers enjoy relief at their marginal income tax rate of 40 per cent while lower rate taxpayers get only 20 per cent. Setting a flat rate of 25 per cent would raise about £4 billion, the Resolution Foundation has estimated.

Green and windfall taxes Fuel duty has not risen in line with inflation for a decade. The latest freeze, in March, cost £500 million. The beneficiaries of coronavirus, the companies that have profited, may be asked to make a contribution in the form of a one-off windfall tax.

SPENDING Public sector wage restraint Last year, the payroll cost of Britain’s 5.3 million public sector workers was for the first time the largest single government expense at £256 billion, even larger than the £230 billion social security bill. Two fifths of that, £96 billion, is the cost of servicing the pensions. A 1 per cent lower pay rise would save £2 billion.

The chancellor could

look to Scandinavia as

he searches for ways to

fix the nation’s finances,

Philip Aldrick writes

Net borrowing as a % of GDP

2009-10 10.2%

2010-11 8.7%

2011-12 7. 3 %

2012-13 7. 3 %

2013-14 5.8%

2014-15 5.2%

2015-16 4.2%

2016-17 2.8%

2017-18 2.7%

2018-19 1.9%

2019-20 2.5%

2020-21* 18.9%

Source: OBR *Estimate

G7 debt to GDP 2020-21

UK 95.8%

Germany 65.6%

France 116.4%

Italy 150.4%

US 131.9%

Japan 247.6%

Canada 108.6%

Source: IMF, April 2020

Where Britain stands

Public sector current receipts

Income tax £208bn

National insurance contributions £150bn

Excise duties £48bn

VAT £161bn Corporation tax £58bn

Business rates £32bn

Council tax £38bn

Other non-taxes £87bn Other taxes £91bn

Total £873bn

,

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with e of bout than most countries

Fuel dut in line w a dec free cos Th of th th pr as con fform wwindfa

SPENDI Public s restrain

Extra QE could combat hit from Covid and Brexit

A Bank of England rate setter has sig- nalled that more quantitative easing was on the cards as he warned that the economy may struggle to recover quickly in the face of coronavirus and Brexit. Michael Saunders, an external member of the monetary policy com- mittee, said more QE was “quite likely” as he warned that the outlook for jobs was “very worrying” and growth may disappoint compared with the Bank’s forecasts last month. The Bank has taken extraordinary measures to grapple with the crisis, cut-

ting rates from 0.75 per cent to 0.1 per cent, launching £300 billion more QE, relaxing banking regulations, provid- ing commercial paper loans to business and flooding the financial system with liquidity. Mr Saunders’s cautionary tone fol- lowed comments this week from Sir Dave Ramsden, a deputy governor, and Gertjan Vlieghe, another external rate- setter, who warned that the damage from coronavirus may be more than the 1.5 per cent of permanently lost GDP. The Bank is forecasting the economy to shrink 9.5 per cent this year and officials have repeatedly said there is head-

room to ease monetary policy further. Markets are pricing another £100 billion of QE in November. “I consider it quite likely that additional monetary easing will be appro- priate in order to achieve a sustained return of inflation to the 2 per cent target,” Mr Saunders said in an online webinar. More quantitative easing was “clearly an option”, he added. After shrinking 20.4 per cent in the second quarter, the economy has bounced back and is on track to grow at about 15 per cent in the third quarter. However, Mr Saunders said that the rebound was the result of a “benign

window” created by the easing of lockdown and government support schemes such as furlough. “This window may now be closing,” he added. He warned that it was “possible we will be living with Covid for much if not all of the three-year forecast period”, with risks of another national lockdown or “rolling local lockdowns [that] have not so far been cushioned by large additional fiscal support”. Signs that Brexit talks are not pro- gressing well could also deter spending, with “risks on the side of a thinner trade deal, a less-smooth transition, or more persistent Brexit-related uncertainty”.

Philip Aldrick Economics Editor

The Times - UK (2020-09-05)

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