Knee-jerk tax increases would risk plunging the UK economy into a depression.
Only by unleashing the power of free enterprise can we hope to recover from this crisis.
Regardless of the merits of the lockdown, it is undeniable that it has been costly. The UK economy is forecast to shrink by more than a third in the second quarter of this year. The unemployment rate will reach double digits, with hundreds of thousands of those currently on furlough facing deferred redundancy at the end of October.
With the deficit approaching £300 billion and debt soaring to 100% of GDP, the media has started to speculate that taxes will have to rise to pay for all of the extra borrowing. However, this line of thinking is flawed. The government cannot simply take an ever greater portion of a shrinking pie. The only way to pay for the public services that we all want is to grow the economy.
The focus now must be on freeing enterprise, not squeezing even more from an already overtaxed workforce.
That is why it is so important to get people back to work safely as soon as possible. The longer the restrictions on businesses last, the more firms will go under and the greater risk there is of significant ‘scarring’ to the UK economy in the long-term.
Businesses up and down the country are already showing how they can get back to work safely. From installing screens at shop tills to providing staff with PPE, we can stop the spread of the virus whilst getting the economy moving again. This should be made even easier with the implementation of NHS Test and Trace.
The government needs to look at giving employers incentives to start hiring again – through a National Insurance tax holiday, for example. They must resist the temptation to introduce stealth tax rises, such as using low oil prices to end the freeze on fuel duty. The UK economy will only recover if consumers have the confidence to spend – so the government should be implementing short-term tax cuts for workers.
At the beginning of this crisis, Universal Credit allowances were increased by £1,000 to support those who were made unemployed. These enhanced allowances expire in April next year. When they do, the government ought to put in place support to help workers by reducing the rate at which their benefits are reduced as they move back into employment.
The Chancellor will need to gradually get back to his fiscal rules, balance the current budget and pay down debt. To do this and still meet his commitments on schools, hospitals, police and defence, there will have to be a temporary suspension of the Triple Lock and a radical shakeup of Whitehall. Therefore, the decision to merge the Department for International Development with the Foreign Office is to be welcomed.
The government should now go further to drive efficiencies and aide our recovery with targeted investments in shovel-ready projects. Business, Housing and Transport should all be merged into a single Department for Infrastructure and Innovation to bring together different aspects of the ‘levelling up’ agenda and accelerate the delivery of current investment plans.
Taxes that do the most economic damage, including Stamp Duty, ought to be permanently slashed. Capital allowances, such as the Annual Investment Allowance and the allowance for structures and buildings should be expanded, too. Cutting taxes on employment and investment would be far more beneficial to our long-term recovery than a temporary reduction in VAT, which would be expensive and involve a large dead-weight cost.
The disruption caused by Coronavirus could also be used as an opportunity to enact fundamental tax reform. For example, half of the businesses in the UK – including all retailers – will pay nothing in business rates this year. Rather than going back to the same broken system next year, which punishes businesses when they invest in their property, the Chancellor could replace business rates with a tax on commercial land.
It is often difficult to implement such radical changes in normal times, as there are inevitably winners and losers from revenue-neutral tax reform. Implementing this change after a one-year tax holiday would be much simpler and supercharge our recovery by improving the tax treatment of capital investment.
Combining these tax reforms and targeted infrastructure investments with the removal of damaging regulations, new trade deals with non-EU countries, and a plan for the retraining of displaced workers should allow the UK economy to rebound strongly next year.
The government should be commended for its comprehensive economic response going into this crisis. Let’s hope they get the recovery plan right, too.
Ryan Hoey, Politics Student at Queen’s University Belfast and Conservative Candidate in the 2018 Local Elections