UK Government Faces Tough Decisions On Tax

by Robert Lee, Tax-News.com, London

16 October 2009

A new report has suggested that taxes in the UK may have to rise by as much as GBP26bn annually in the years ahead if the government is to make serious inroads into the budget gap without deep cuts in spending.

The PricewaterhouseCoopers (PwC) report, entitled "Dealing with (even more) debt – Big decisions, tough choices," concludes that the government will need to achieve its fiscal tightening targets much earlier to mitigate the risk of higher interest rates on UK public debt, provide a buffer against the cost of future recessions, and insure against an ageing population. This will necessitate across-the-board increases in taxation, including income tax, national insurance and value-added tax.

John Hawksworth, Head of Macroeconomics at PwC, said: “Although there are signs that the recession may be easing, it has taken a heavy toll on the UK’s public finances, with a structural budget deficit of around 10% of GDP expected this year. Higher public borrowing was unavoidable in the short term, but government has a responsibility to plan now to put the public finances back on a sustainable footing in the medium term."

He added: “Taking into account that our economic growth projections are somewhat less optimistic than those made by Treasury, we think government will have to close a fiscal gap of around 3% of GDP by 2015/16, rather than waiting until 2017/18 to achieve this target, as in the 2009 budget projections.

If this new target is to be hit, PwC calculates that additional fiscal tightening of around 1.8% of GDP is needed by 2013/14 – the equivalent of GBP26bn at today's values.

The report outlines three basic options open to the government:

• raise the money entirely through taxation, building up to around GBP26bin per annum, with public spending plans as in the 2009 budget;
• achieve the target entirely through spending cuts, which would be mean a cumulative real reduction in departmental spending of around 17% in the three years to 2013/14 (or around 23% for other departments if health is protected from real spending cuts); or
• a mixture of both – the most likely and realistic option.

However, PwC says that the last option would "still require significant rises in major revenue raisers."

Jon Sibson, partner and government and public sector leader of PwC, said: “On any credible fiscal scenario there will be a need for spending restraint. Politicians are being forced to debate this stark reality and officials are now considering the implications of a public sector recession. The challenge is to cut spending without damaging frontline services, particularly to the most vulnerable sections of society at a time of recession and increasing need."

Hawksworth concluded: “Irrespective of who wins the next general election, turning the tide of debt through a prioritized approach to taxation and spending will be critical to steering the economy back to sustainable growth in the longer term. Failing to fix the public finances, by contrast, would risk persistently high interest rates, a more volatile currency, and a less certain environment for business.”

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