Tax raid will derail recovery, Sunak told
Economists urge caution amid growing evidence of rebound with increased spending by consumers
Russell Lynch Tim Wallace PROMINENT economists have urged Rishi Sunak, the Chancellor, not to derail Britain’s recovery with an autumn tax raid, amid growing evidence that a rebound is gathering pace.
Experts warned that Treasury plans for a cash grab could crush signs of life in the economy, as data revealed a housing “mini-boom”, rising footfall and surging credit card spending. Bank of England statistics showed that households took on more consumer debt than they paid off in July for the first time since February, after bars and restaurants reopened and the economy emerged from deep freeze.
Meanwhile, retail monitor Springboard recorded a 6pc rise in footfall across shopping areas last week compared to the previous seven days. Footfall was 26pc lower than a year earlier, the smallest fall since Covid hit.
But appearing before MPs on the Treasury select committee, economists said that a rumoured plan for huge tax hikes in the Chancellor’s autumn Budget could crush any hopes of a “Vshaped” rebound. Paul Johnson, the Institute of Fiscal Studies director, said a reckoning is likely in coming years, after the furlough programme and other Covid rescue schemes sent national debt surging above 100pc of GDP for the first time since 1963.
However, he said: “Even if we don’t get second waves we are not very clear on where the economy is going to go, but we are pretty clear that it is going to be weak for some period.
“So I certainly don’t think we should be looking at tax rises this year, and I would be surprised if we see significant tax rises next year.”
Bank of England data showed that after four months of paying down debts, households took on an extra £1.2bn of debt in July through personal loans and credit card spending – more than the average £1.1bn over the 18 months to February. The housing market also picked up sharply, bolstered by a temporary cut to stamp duty.
There were 66,3000 mortgage approvals in the month, up by 26,000 from June, as households took out a net £2.7bn in new mortgage borrowing.
Andrew Wishart of Capital Economics said the soaring approvals “provide hard evidence of the mini-boom that appears to be going on in the housing market thanks to pent-up demand and the stamp duty holiday”.
Treasury officials are pushing for hikes to corporation and capital gains tax. They are also eyeing a new levy on online businesses, cuts to pension relief and increased fuel duty. Mandarins fear the record deficit of more than £300bn this year is dangerously large.
But action on any serious scale could choke off growth, undermining the economy and ultimately damaging the public finances further. Higher taxes could lead to an exodus of top talent and hold back business investment – and if the economy is smaller as a result, this will lead to a lower overall tax take. Mr Johnson said the Chancellor could eventually have to raise around 2pc of national income, just over £44bn, from taxes if spending is not reduced.
Gemma Tetlow, chief economist at the Institute for Government, said Covid may have blown a £60bn hole in the public finances in the medium term, adding: “That is a huge number, and trying to announce a package of tax measures that would fill that would be very significant, and the public hasn’t been talked through the necessary tax rises.
“Trying to announce specific measures very quickly runs the risk that you end up being backed into a corner of the most politically feasible tax changes, which are often not the most sensible economically.”
‘Even if we don’t get second waves [of the virus] we are not very clear on where the economy is going to go’