Kevin Hollinrake is MP for Thirsk and Malton.
Let’s face it, long before the economic devastation of the Coronavirus crisis we had a substantial and growing hole in our strategic finances.
Despite the valiant efforts to balance the books by successive Chancellors in recent years, the age-related triple cost pressures of pensions, healthcare and adult social care will make this task impossible without significant increases in taxation, cuts in spending – or new thinking.
According to the Office of Budget Responsibility, public sector net debt will grow from its current 104 per cent of GDP to an unsustainable 314 per cent by 2060. Reduced immigration and a falling fertility rate (now around 1.68 children per woman from 1.9 in 2012, according to the ONS), will gradually reduce the number of working-age taxpayers and increase the burden on the rest further still.
Modern monetary theorists would argue that debt doesn’t matter if you have a sovereign currency and can print your own money, but history shows that this would lead to rampant inflation, crippling interest rates, and an economic depression. As Warren Buffet would say, “what we learn from history is that we don’t learn from history”.
Tax hawks argue against tax hikes and for increased tax receipts from economic growth. They often point to increased proceeds from corporation tax following the reduction in the headline rate from 28 per cent in 2010 to 19 per cent in 2017. But this was primarily due to the economic recovery. As the Chancellor said recently, there are few, if any, taxes that are to the right of the peak of the Laffer Curve, meaning that any decreases would result in less revenue for the Exchequer.
Post-Covid, the Chancellor is likely to revert to his natural conservative principles of living within our means. I remember well one of Rishi Sunak’s first speeches in Parliament in July 2015 when he set out clearly the need to balance the books and that “in normal times, public spending should not exceed 37 per cent of GDP”.
I don’t see any political appetite for meaningful cuts in public spending. If anything, judging by the widespread support for an £20/week increase to the Universal Credit standard allowance, Covid seems to have increased the public appetite for a more generous system of social spending. This measure alone will cost the taxpayer £6bn per annum and a permanent increase would require an extra penny on income tax. The other driver for tax reform is the need to ‘level up’ the nation. But infrastructure and skills investments are vital but will have very limited effects in the short term, whilst tax changes can have an immediate impact on household finances.
So, there is a real need for new thinking and an open and honest debate that leads to a sustainable, simpler, fairer tax system and a more dynamic economy. My own preferences include:
1) A German-style adult social care premium where everyone pays something so that no-one has to lose everything.
Crucially, this is not a tax – no more so than saving for a pension is a tax. Like Germany, the system would not flow through the Treasury’s sticky fingers, but would be managed by a third-party, not-for-profit insurance sector. It requires every citizen to do what many already do, save for later years rainy days.
Contributions are then pooled nationally so that everyone gets cover from day one. Entitlement is independently assessed and recipients can choose to receive care from a provider or take a monthly cash sum and then pay a relative, friend or neighbour to provide care.
2) Abolish business rates and replace the revenue with a small increase in VAT and a reduction in the registration threshold.
An online sales tax may be popular politically but it will further complicate a fiendishly complex tax system. We should also bear in mind that it isn’t only the retail sector that is being challenged by new competition with lower cost bases, for example restaurants from the likes of Deliveroo and estate agents from PurpleBricks and others. The currently £85,000 registration threshold creates an incentive for businesses not to scale up, limiting productivity, economic activity and job creation.
3) Capital Gains Tax rates to be brought into line with Income Tax rates for short term gains.
4) A requirement for directors of limited companies to pay themselves at least the National Living Wage before they can take dividends.
5) Increase Class 4 National Insurance Contributions to cover past and future Government support and social security schemes for the self-employed.
6) Clamp down further on tax avoidance by multinationals including the banning of pre-tax payment of royalties, a tactic used by the likes of Starbucks to transfer revenue and taxable profits out of the UK.
7) A proportional property tax that would replace council tax and include the complete abolition of stamp duty, a transactional tax that puts a brake on activity.
al tax that puts a brake on activity.