A dif­fi­cult bal­anc­ing act

The Sunday Telegraph - Money & Business - - Business - Writes He­len Chan­dler-wilde.

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.”

The bill

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

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