Is the British Government Going to Raise Taxes to Ease Its Debt Burden?

Summary

• The public debt levels of the British government are set to cross £360 billion, by the end of this year, which is one of the highest the country has seen in its modern history.
• Several conservative MP’s had raised queries regarding the manner in which the government intends to raise its taxes and are concerned that higher tax rates might harm businesses.
• The Bank of England is estimating that most of the furloughed workers should be back at their jobs by the end of the year

In an address to the conservative party, MP's the British Prime minister has stated that the economic outlook of the country is going to get tougher in the coming few months before things begin to improve. Several of the senior conservative party leaders had recently expressed their displeasure on how the government has been handling the economy, which was the precursor for this meeting. Chancellor Sunak who also addressed the MP’s at the meet stated that tough the situation is going to get tough in the short run, but the government will take all possible measures to ease the burden on the businesses. There have been increased concerns in the country regarding a massive rise in tax rates after a report by OBR (Office of Budget Responsibility) released a report last month stating that the government needs to increase its tax rates by at least 50 per cent or £60 billion a year if the fiscal situation has to be brought under control within the next decade.

Why raising taxes has become unavoidable?

The British government has taken in massive borrowings in the past few months to support the various stimulus schemes, which were announced to support business in the country fight off the adverse trading conditions ensuing out of the coronavirus pandemic. The present levels of unemployment in the country are close to 3.9 per cent, and the debt levels of the government are also expected to rise to a high of £370 billion for the full year in 2020. These borrowing levels are extremely high, and any further increase in it could very well make things unsustainable.

How prepared is the British economy to withstand a rise in tax rates?

Though the pandemic conditions continue to prevail , there is some sign of recovery in economic activity in the country, with momentum picking up in important sectors like housing construction sector already getting back to expansionary levels. The government had also started to give relaxation on the workplace social distancing measures it had recommended when the first unlocking was done in the first week of May. Excepting for a few, most industries are now in the recovery mode with the Bank of England (BOE) estimating that most of the furloughed workers should be back at their jobs by the end of the year.

Most of the government’s existing tax revenue streams are transaction-based, for example, transfer of salary from employer to employee, sale of goods, sale of property manufacturing, imports, etcetera. During this period, when the business activity levels in the country are at their lowest levels, the transaction levels on most of these heads has also come down. The stimulus packages the government had rolled out earlier this year has helped these transactions not to fall sharply and the economy is bouncing back at a faster rate. However, a hasty imposition of taxes could result in the recovery process, getting impeded and hurting the economy as a result. Thus the government will have to be very careful in how it goes about its policies in this regard.

What are the major challenges before the British economy for the next year?

There are many challenges in front of the government; however, four important risk factors that need to be mindful. First, and one of the most crucial is the risk of a resurrection of the pandemic during the winter months in the last quarter of the year. If the situation does worsen, then the government might be forced to impose a lockdown again which will undo most of the reform, if not all of the economic recoveries that have happened since May.

Second, is the delay in the availability of the vaccine, beyond the due date its manufacturers have envisaged. Under such a situation, the government would be forced to increase its borrowings to continue funding its stimulus programmes than what it had originally estimated, in order to protect businesses and livelihoods in the country. This will lay an additional burden on the exchequer.

The third is the withdrawal of the furloughing scheme, which could result in the unemployment rates in the country shooting up suddenly and significantly. A high unemployment rate will make people more jittery about the recovery, and they will become wary, resulting in a cyclic effect of less spending by the general public which will slow down the recovery process even further.

Fourth, and the most critical risk element is the failure of the Brexit talks. The UK and the EU while they parted ways on 31 January 2020, they had given Brexit deal negotiations time till 31 December 2020, to arrive at a suitable agreement to protect the interests of businesses on both sides. In the event the talks don’t work out a new regimen of taxation would come to be imposed, let alone the massive amount of new bureaucratic hurdles businesses would have to face.

Conclusion

The Boris Johnson government has been repeatedly stating that it would not opt the austerity route to retire off the debts it has piled up till now. The government is of the opinion that increased public spending will stimulate high growth in the economy which will create a large base for it to collect taxes and repay its debts. However, given the battering that the economy has taken in the recent past, the base for the existing tax structures has actually shrunk. Hence the only room now left before it is to explore the possibility of widening the tax base if it wants to fill the exchequer in the short run. This will not only result in avoiding the existing tax rates exorbitantly but will also create the possibility for it to earn more taxes in the future.