Tax rises?
Finally, the most difficult question is whether the Chancellor will
announce further tax rises - not to take effect now, but to start
taking effect after the next General Election. Roger Bootle, economic
adviser to Deloitte, notes that further fiscal tightening will be
needed,, since the UK economy has performed less well than hoped at PBR.
As a result, it is thought extra fiscal tightening will be needed to
repay the extra borrowing. However, this is clearly a political issue,
as well as an economic issue.
The Chancellor has announced increases in income tax for those earning
over £100,000 and NIC increases for everyone (although partly
ameliorated for the lower paid and their employers by increasing the
lower threshold).
Perhaps he might consider an increase in the VAT rate, to 18.5%, which
of course he considered and rejected last autumn. This would raise over
£5 billion and would cost someone on average earnings of £25,000 about
£1 per week. Of course it would be necessary to compensate those on very
low incomes by increasing credits and benefits.
The Chancellor could of course go back to National Insurance and
increase rates by another ½%. The difficulty with this approach is that
there would be no easy way to help the lower paid and it may well be
disadvantageous to increase the cost of employment as the economy comes
out of recession.
Yet another option could be to increase the basic rate of income tax by
1%, to 21%. This would raise over £3 billion and would cost someone
earning £25,000 a further £3.50 per week - more than the VAT increase.
Putting up the top rate of tax doesn't seem to raise as much money. The
new 45% rate at £150,000 is estimated by the Treasury to raise only £670
million in the first year - although the second year will raise more
(the Treasury hasn't given us their figures). Could an increase to 50%
be considered?
