Spending review presages tax rises

The stark picture of an emerging ‘economic emergency’ painted by the Chancellor’s spending review has prompted predictions of significant tax rises in the year ahead, and potentially over the lifetime of this Parliament

Chris Sanger, EY’s head of tax policy, pointed out that In addition to the government direct spending response on Covid, the Office for Budget Responsibility (OBR) spending review document reveals there have been no less than 26 tax measures since the Chancellor’s formal pre-Covid Budget proposals in March.

‘In total, the OBR report reveals that there has been £29bn worth of tax giveaways since numbers that the OBR signed off for March – a far cry from the “fiscally neutral” budgets of his predecessor. The size of the number is even more staggering given that all of this is without an Autumn Budget,’ Sanger said.

The spending review confirmed the government will increase the 2021/22 income tax personal allowance and higher rate threshold by 0.5% in line with the September CPI figure, the minimum required by legislation, and will use the same figure for setting all National Insurance limits and thresholds for 2021/22.

The OBR’s forecast for tax receipts in 2020/21 is £101.9bn lower than its March forecast.

Sanger said: ‘The Chancellor continues to maintain that the UK must begin “returning to sustainable public finances”, indicating tax rises are likely to be on the way.

‘The OBR report gives an indication of the size of tax rise (or spending cuts) required (between 1 and 4% of GDP) and overall the documents demonstrate the scope of the challenge ahead for the government in 'balancing the books' while helping to drive the economy forward.’

However, David Hough, business advisory partner at Blick Rothenberg, said there was little indication in the spending review as to how this will be achieved.

Hough said: ‘Pauses to public sector pay and reductions in overseas aid will only make a partial impact on the significant deficits that have arisen. In the short term it appears that the Chancellor is banking on infrastructure investment to return the UK back to economic growth so that when tax rises come, they will fall on a more resilient economy.’

George Bull, tax consultant at RSM, argued that the Chancellor had shown himself sensitive to the idea that tax increases should not be imposed too early, because of the risk of choking off the economic recovery.

‘Nevertheless, the scale of the 2020/21 coronavirus costs means that tax increases are inevitable.

‘It is most likely that we will see the first of these announced in the spring Budget with tax rate changes likely to take effect from April 2021.

‘More tax increases can be expected in April 2022,’ he said.

Bull also pointed out that, in more usual circumstances, the Chancellor might be expected to implement any tax increases on the basis that they were only temporary, given the general election pending in 2024.

However, the spending review did not specifically address challenges to the economy produced by Brexit. 

Bull said: ‘It was widely anticipated that UK borrowing would continue to increase until vaccinations had been administered and the coronavirus brought under control.

 ‘What has come as a great surprise today is to see that UK borrowing is projected to continue increasing, at least until 2025/26.

‘This suggests that recent comments by the Bank of England governor Andrew Bailey, to the effect that Brexit will be more expensive for the UK than the coronavirus, have a lot of truth in them.

‘The longer, deeper borrowing curve implies that the UK will face a far greater fiscal crisis. This may mean that the widely expected tax rises will be bigger and will continue for longer than had previously been expected.’

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