Economists Spar Over Whether U.K. Should Lift Tax to Tackle Debt By Bloomberg

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(Bloomberg) — Fiscal policy experts clashed over whether Chancellor of the Exchequer Rishi Sunak should raise taxes to tackle the U.K.’s ballooning debt pile in the wake of the coronavirus pandemic.

“Our tax take is significantly below the rate of many other countries” in northern and Western Europe, Institute for Fiscal Studies Director Paul Johnson told the House of Commons Treasury Committee on Tuesday. “That does implicate that it is possible to run a pretty effective and efficient economy with a higher tax burden than the U.K. currently has.”

Johnson was backed up by two other panelists at the hearing, Institute for Government Chief Economist Gemma Tetlow and Resolution Foundation Chief Economist Mike Brewer. But Professor Philip Booth, a fellow at the Institute of Economic Affairs, warned that “you damage the economy with a tax system a long time before you get to the point at which you can’t raise any more taxes.”

Sunak faces the challenge of reining in a national debt that’s ballooned to more than 2 trillion pounds ($2.7 trillion) for the first time amid the cost of supporting the economy through the pandemic, without suffocating the recovery from what may be the country’s worst recession in three centuries.

The Office for Budget Responsibility has calculated that a fiscal tightening equal to 60 billion pounds will be needed every decade to return debt from its current levels above 100% of GDP to a long-term sustainable rate around 75% by 2070.

Tory Backlash

With a budget planned for the fall, U.K. newspapers in recent days have reported that the Treasury plans to raise taxes on fuel, corporations and capital gains, while lowering tax relief on pensions. That’s sparked a backlash from members of Prime Minister Boris Johnson’s Conservative Party who oppose tax hikes.

Economists appearing before the Treasury Committee agreed that now is not the time to be raising taxes, however, given the prospect of a sharp rise in unemployment as government aid comes to an end and the risk of a second wave of cornavirus infections. Johnson said he’d be surprised if there significant increases were introduced before 2022.

Prior to the pandemic, the U.K. tax take amounted to about 37% of economic output, well below rates of around 47% in Italy and Germany and above 50% in France and Finland. Britain’s decade of austerity following the financial crisis placed the heaviest burden on spending, which was slashed by around 7 percentage points of GDP.

The economists were responding to questioning from committee member Julie Marson, a Conservative lawmaker, who asked whether they agreed with her assessment that “there’s a strong body of evidence that suggests that we are at or at least very close to the upper limit of the taxable capacity.”

“We shouldn’t think of it as the upper limit now,” Tetlow said. “What matters more importantly is the structure of the tax system and how it influences economic behavior. A well-designed tax system could raise more money whilst doing less to distort activity than a very poorly-designed tax system, and there certainly are areas for improvement.”

Panelists earlier suggested measures that could reduce distortions as including broadening the range of goods subject to value added tax and leveling the tax treatment of the self-employed with the employed.

©2020 Bloomberg L.P.

 

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