Darling Hints That UK Taxes Must Rise

by Robert Lee, Tax-News.com, London

03 November 2008

While UK Chancellor of the Exchequer Alistair Darling appeared to suggest on Wednesday that he has no intention of raising taxes during an economic recession (or indeed in the 18 months before a general election), he has also acknowledged that the government, whoever is in control of it, will eventually have to put up taxes to pay for the government's ballooning spending commitments.

As the government's 'golden rule' to borrow only to fund long-term investment finally went out of the window, Darling argued in his Mais Lecture at the Case Business School in London that the government had little choice but to spend its way out of the economic downturn using borrowed money as tax revenues collapse. To persist with the golden rule, which has kept the UK's debt as a proportion of gross domestic product just under 40%, would be "perverse" under the current circumstances, Darling remarked.

"First, we all know that tax is hard to collect at the best of times. But today we see global events further depressing tax revenues," he said.

"The credit crunch affects the tax take from the financial sector, which over recent years has been generating about 25% of our corporation tax revenue. Earnings in that sector are falling, bringing in less tax. As house and share prices fall, capital gains tax receipts fall while stamp duty is down. Increases in oil prices, contrary to popular belief, don’t provide a significant windfall for the exchequer," the Chancellor observed.

"To increase borrowing in a downturn is sensible – to support people and business across the economy," he went on to argue.

The government is expected to borrow GBP60bn this year just to meet its ongoing spending commitments, even before the banking sector rescue package has been factored into the equation. Meanwhile, the budget deficit may reach GBP100bn in 2009/10, a post-war record. However, while these figures may be sustainable in the short-term, in the medium to long-term, the money will have to be paid back, a fact not lost on the Chancellor.

"People should be in no doubt that government will take the decisions necessary, to ensure sustainability in the medium term. To return borrowing and debt to a sustainable level - once these shocks have worked through - just as we have in the past," the Chancellor said.

Darling is expected to announce new fiscal rules in his upcoming pre-budget report, but some tax experts and economic commentators believe that he will have little choice but to begin raising taxes to ensure that the public finances do not tail-spin out of control.

It is already widely anticipated that Darling will crack down on City bonuses with new tax rules to encourage share schemes, but others think that value-added tax, currently 17.5% is a prime target for the government, with some predicting that the rate could rise to as high as 20%. This could raise an extra GBP12bn annually. Moreover, increasing indirect taxation would not be as visible to the average taxpayer as an increase in the rate of income tax. With the UK's VAT rate currently at the lower end of the scale in the EU, which has imposed a minimum VAT rate of 15%, the government could conceivably argue that a VAT increase is overdue, although this would be an unwelcome present for the nation's retailers braced for one of the quietest Christmas shopping seasons for some time.

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