A difficult balancing act
in Universal Credit. This would cost an estimated £31bn per year by 2022-23.
The Institute for Fiscal Studies uses a tighter definition that allows the planned extra spending on the NHS and aid, then matches inflation in every other area of spending. Even this plan to hold all spending steady in real terms would cost an extra £19bn per year by the end of this parliament.
Although the term “austerity” has passed into common usage, spending in cash terms has climbed in every year. Total managed expenditure rose from £695.2bn in 2009-10 to £790.7bn in the last financial year. Some departments and areas of spending have been squeezed, but on a net basis it has been an effort to reduce growth in spending rather than make cuts.
“As is the case in so much of economics there are no easy solutions, only trade-offs,” says Ian Stewart, chief economist at Deloitte. “For public sector austerity to end without pushing the UK further into debt is likely to mean a dose of private sector austerity – in the form of higher taxes.”
Demands for spending might be back but that does not mean it will be easy to persuade MPS to back tax rises.
With a slender working majority, Hammond is in a tight spot when it comes to revenue raising. Options are available to bring in cash through a series of small raids, particularly by bashing unpopular targets. An “Amazon tax” is among a series “A decade after the financial crash, people need to know that the austerity it led to is over”, said Theresa May in her speech to the Conservative Party conference this September. But she also warned that “there must be no return to the uncontrolled borrowing of the past”, The national debt climbed dramatically after the 2008 financial crisis. In 2010, George Osborne, coalition chancellor at the time, promised to balance the books. The UK owed £960bn in debt, or £15,483 for every person. Despite his pledges to rein in spending, and protests against austerity, the debt has of potential hikes floated recently, hitting companies that are perceived to pay too little tax while knocking the competition to the embattled high street.
“Digital business and the selfemployed appear to be the most obvious targets but with innovation and entrepreneurship both key to the country’s future attractiveness, measures need to be properly targeted and thought through,” says Stella Amiss at PWC.
“Ultimately, we need to properly reform a creaking tax system that’s struggling to keep up with modern ways of working and doing business, and look to create one that sets a clear path for a post-brexit UK. More short-term sticking plasters will only hold the cracks together for so long.”
A full overhaul is not on the agenda yet, however.
Chris Sanger, a tax expert at
EY, anticipates small and, at face value, uncontroversial moves will be used to raise a significant sum. increased. The UK’S debt mountain is now £1,764bn, almost double the level of 2010 and equivalent to over £26,727 per person.
The country still runs a deficit – it spends more than it takes in taxation revenue – so every year this figure gets bigger.
This borrowing has a price. The country is on track to spend £41bn just to pay interest on the debt in the financial year 2018-19. That is significantly more than the entire policing budget, £35bn; the transport budget, £35bn; or around 40pc of the education budget, £102bn. The debt now stands at 85pc of GDP. This breaches EU rules allowing up to 60pc of GDP in debt. Corporation tax is due to fall from 19pc to 17pc. Postponing that would rake in an extra £5bn per year. It could also placate an EU worried about extra tax competition.
Imposing a digital services tax could bring in the best part of £1bn per year. This is an EU plan to tax search engines, social networks and online marketplaces’ revenues, as a stopgap, while bigger changes to international taxes are negotiated. Eu-wide it could raise an estimated £5bn, but progress is slow and Hammond has indicated he may go it alone with a UK version. Changing the rules on off-payroll workers, typically those who incorporate as a personal services company, could rake in up to £1.2bn. A more controversial move would be to cut tax relief on pensions contributions again, capping the allowance at £20,000 per year. But the big taxes, such as VAT, national insurance and income tax will probably be left alone, Sanger believes. “I anticipate a ‘caretaker budget’. Given uncertainty around the Brexit negotiations the Chancellor could delay any big decisions, using the wiggle room he’s left himself to make announcements when economic circumstances demand it,” says Sanger. Most EU nations break this rule, including Germany, which owes 62.9pc of its GDP; Italy, which owes 133.4pc; and Greece, which owes 180.4pc. Although servicing this might be manageable when interest rates are low, it would be far more expensive in a “normal” rates environment.
The borrowers UK debt has soared despite Osborne’s pledge to balance the books