Tax rises could choke recovery, Sunak told
MPS and business leaders warn of potential damage as finances reel from Covid
TAX rises could “choke off” the UK’S coronavirus recovery, cause an exodus of top talent and cripple the nation’s investment appeal after Brexit, Rishi Sunak has been warned.
The intervention from a host of business leaders, economists and Tory MPS comes amid speculation that the Chancellor is considering a rise in corporation tax from 19 per cent to 24 per cent as part of plans to repair the hole in the nation’s finances in the wake of the pandemic.
Increases also under consideration for the autumn Budget are said to include a rise in capital gains tax and the drastic scaling back of pension reliefs for top earners as the Treasury looks to claw back the cost of tackling Covid-19.
The Office for Budget Responsibility’s main scenario warns of a record £322 billion in borrowing this year and a deficit standing at £116billion, or 4.6 per cent of predicted GDP in 2024-25.
But business groups and some Tory MPS have reacted with horror to the potential rise in corporation tax as companies attempt to pick themselves up off the floor after a lockdown that reduced the size of the economy by 20.4 per cent between April and June.
Downing Street is also opposed to the move, with Boris Johnson telling ministers that other measures, such as cutting Whitehall spending, should be considered first.
Marcus Fysh, a Tory backbencher, said tax increases would be the “wrong response” to the coronavirus crisis and urged the Prime Minister to “resist” them. Mr Fysh said: “We need to help the economy, not strangle it. These mixed messages are in themselves damaging and must stop.”
John Redwood, the former Cabinet minister, said: “You cannot tax your way to faster growth and more prosperity. We need policies to promote more jobs and activity to get the deficit down.” Adam Marshall, director-general of the British Chambers of Commerce, warned: “Raising the tax burden on business and entrepreneurs before they have a chance to recover could create serious issues for the trajectory of the UK’S overall recovery.
“It could slow investment, it could slow risk taking among entrepreneurs and growth businesses.
“Everybody in business understands the public finances have to be repaired but do it too early and you risk choking off growth at the crucial moment.”
According to the Treasury’s own estimates, raising corporation tax to 24 per cent would raise £17billion per year, while capital gains tax increases would generate another £1.05billion.
Cutting pension tax relief to 20 per cent would raise £11billion, the Institute for Fiscal Studies has calculated, while a 2 per cent online sales tax would bring in £2billion and a 1 per cent increase in fuel duty £295million.
Tory MPS are nervous about any increase in corporation tax, in particular, because increasing it to 24 per cent would parrot Labour’s tax policy.
Stephen Barclay, the Chief Secretary to the Treasury, refused to rule out rises and insisted such issues were a matter for the Budget.
Some experts warned that such a move would be seen as a “sea change” in tax policy and send a signal that the UK was “closed for business”.
Chris Sanger, head of UK tax policy at accountants EY, said: “The UK has been on a long journey to reduce its corporation rate, which is seen by many businesses as an indicator of how competitive a country wants to be.
“The UK has prided itself on having the lowest corporate tax rate of any G20 country. The Saudis have a rate of 20 per cent so it will stop them claiming that and be seen as a sea change in tax policy.”
Matthew Lesh, head of research at the Adam Smith Institute, called on the
Government to “get its own house in order” by cutting spending before tax hikes. He said: “Higher corporate taxes would mean less investment, fewer jobs, lower wages and higher prices.
“Cutting corporation tax made Britain one of the best places in the world to invest and supported the pre-covid jobs boom. A hike in corporate tax rates would send a pretty clear message: Britain is closed for business.”
Peter Hargreaves, the Brexit-supporting billionaire founder of investment platform Hargreaves Lansdown, warned that top businessmen could flee. He said: “The more you tax business, the less tax you get. I think the Government would be very, very silly to start increasing taxes for anybody.
“Once a country feels it is a high tax country, everybody works out how to avoid it. I know lots and lots of very wealthy people – a lot of them are saying, ‘if you put taxes up higher I’m on the plane’. I’ve no intention of going, I love this country, I’m very patriotic. But an awful lot of people will.”
Economists, meanwhile, were scathing of the plans when record low interest rates have slashed the nation’s cost of servicing its debts.
Martin Beck, lead UK economist at Oxford Economics, said: “With the Government presently able to lock in near-record low interest rates on debt which won’t have to be repaid for several decades, talk of hefty tax rises seems both premature and unnecessary. The prospect of inflicting austerity on the private sector won’t help in securing what has, so far, been a promisingly robust economic recovery.”
Stuart Adam, senior research economist with the Institute for Fiscal Studies, said: “If we’re really talking about tax rises for next April, I would worry about that. In the short run the Government
‘The more you tax business, the less tax you get. The Government would be very, very silly to increase taxes’
should probably be looking to cut taxes and increase spending even more than it has done.”
Mr Barclay told Times Radio: “There are always four moving parts to this. The key objective within the Treasury is to get growth.
“There is then a balance between the other three moving parts of debt, of spending, spending feeding into that, and tax.
“And what’s your trade-off then between your spending measures and your tax measures?”