Tax rises and VAT changes will be needed to pay off deficit, experts tell MPs

Economists told the Treasury Select Committee the Government must explain how they plan to reduce the £2 trillion debt without hurting growth.

Chancellor Rishi Sunak visits Scotland
Chancellor Rishi Sunak visits Scotland

Chancellor Rishi Sunak will need to raise more taxes to pay off the unprecedented levels of public debt taken on during the coronavirus crisis, MPs have been told.

The Treasury Select Committee heard remotely from senior economists and academics who said the Government should also consider introducing VAT across more products and services that are currently exempt.

Experts from four think-tanks giving evidence also called on the Government to improve communications on setting out their agenda and avoid “on the hoof” taxation policies.

Cabinet Meeting
Chancellor of the Exchequer Rishi Sunak will need to set out a solid agenda at November’s budget, experts said (Toby Melville/PA)

There was broad agreement that it remains unnecessary to pay down the Government debt, which topped £2 trillion last month for the first time since the 1960s, immediately.

But the panel from the Institute for Government, Institute for Fiscal Studies (IFS), Resolution Foundation (RF) and Institute of Economic Affairs (IEA) agreed that the ratio of tax to income in the UK has not peaked compared with other countries.

Paul Johnson, Director at the Institute for Fiscal Studies (IFS) explained that any rises will need to come thorough income tax, national insurance contributions and VAT.

He said: “I would expect in the medium run at least increases in those taxes simply because that’s where significant amounts of income comes from.”

The IFS economist added that a two or three percent increase of the basic rate of tax of 20% “is not going to do any significant economic damage”.

But his preference was to VAT changes, pointing out the huge extra tax take from the rise in 2011 from 17.5% to 20%.

He added that indirect taxes, like stamp duty or council tax, could be changed, but would have less impact than tackling the key direct ones.

Dr Gemma Tetlow, chief economist at the institute for Government said tax rises were needed but the Government should avoid targeting national insurance contributions as it runs the risk of a greater divide between employees and freelancers.

She explained: “That’s been easier to do because people in their minds draw some connection between national insurance contributions and the benefits you get back when in reality the system doesn’t really work like that.”

The economist also explained that ministers should be thinking about “broadening the base of these taxes” rather than just raising them.

But she warned that problems like the so-called pasty tax backlash must be avoided through proper targeting.

Philip Booth, senior academic fellow at the IEA said we should avoid the high inflation of the 1970s, when the prevailing view was that inflation was a good way of pushing down the real value of the debts.

Along with others, he also called on the Government to be more willing to talk through policies and ideas with a broader number of people.

He explained: “At least Gordon Brown did have a clear political agenda regardless of whether you believed in it or not and was quite transparent in the ways he went about formulating tax policy and having wide discussion of it beforehand.

“But since 2011 you’ve just had taxation policy basically invented on the hoof… we’ve seen successive chancellors… just playing to the gallery, developing taxation policy on the hoof without really putting it to any clear underlying principles whatsoever.”

Pasty tax
The Government will need to avoid the ‘pasty tax’ backlash of 2012 and must target VAT changes, experts said (Geoff Caddick/PA)

Mike Brewer, deputy chief executive and chief economist at the RF agreed that more taxes would need to be raised, but added: “We should not expect to see taxes rising in the next year.”

He explained the Government should also make plans for longer term issues, particularly around social care in an ageing population.

Mr Brewer said: “We either need substantial tax rises or you need to provide less good health, social care and pensions, or the population will have to pay more themselves – that’s what the OBR (Office for Budget Responsibility) are telling us.”

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