This week sees the UK facing up to one of the issues of the Covid-19 pandemic which is all the extra spending and debt that took place. Although it is also entangled in two other consequences one of which is direct, the need for the NHS to catch up on health care which was missed due to the pandemic, and the other more indirect which are the costs of social care. So we have in essence a confused situation where on top of the extra debt we are planning to spend more. We can add up the debt to some extent.
As a result of these low receipts and high expenditure, provisional estimates indicate that in FYE March 2021, the public sector borrowed £298.0 billion, equivalent to 14.2% of the UK’s gross domestic product (GDP), the highest such ratio since the end of World War Two, when it was 15.2% in FYE March 1946……….Public sector net borrowing (PSNB ex) was estimated to have been £78.0 billion in the financial year-to-July 2021;
There was therefore an effect of over £300 billion if we allow for the past pattern of borrowing. Whilst borrowing is very cheap mostly due to the bond buying by the Bank of England ( another £1.15 billion this afternoon) there are debt costs here. Then we have a government which has been keen to deploy fiscal policy now wants to spend more as I explained earlier.
I have pointed out before that government’s struggle in the modern era to raise taxes. Japan has had two goes at raising its Consumption Tax and we learn something from the six-year gap and also the way the economy took a dive. Also the UK tried to raise National Insurance for the self-employed and here is the Guardian from March 2017.
Philip Hammond ditched plans to increase national insurance contributions for the self-employed yesterday, in a humiliating U-turn just a week after the measure formed the centrepiece of his first budget.
Not entirely reassuring for a UK government planning both wider and larger rises.
UK National Insurance
This is a bit of an anachronism as it is not what it looks like. That is that in fact all UK taxes go into the same point and there is no specific funding of the NHS and pensions as politicians like to infer. So it is another type of Income Tax except there are nooks and crannies which I will come to. But let us start with the likely numbers in play.
Across the UK, increasing all rates of employee, employer and self-employed NICs by one percentage point would raise around £10 billion a year in the medium-run (assuming employers passed the increase in employer NICs onto workers in the form of lower earnings); around £8½ billion of that would come from England (relevant because spending on health and social care is devolved). ( Institute for Fiscal Studies)
So the starting point is that you would expect even for these inflated times quite a bit of revenue that would rise over time with wages. Also you get a bit of a bonus in that it will be partly paid by employers which is an initial win. To do this otherwise would require this.
An increase of just under 1.5 percentage points in the basic and higher rates of income tax would raise a similar amount.
Problems do arise from the fact that you are effectively penalising work via the way it is only on earned income missing these bits.
The fact that NICs are not levied on income from bank accounts, dividends or rental property means that they do not discourage saving and investment; ( IFS )
As rental property is a type of business we again see the housing industry finding that taxes do not apply to it. The dividend issue does open a loophole for some.
increasing NICs rates would exacerbate the incentive for people to work through their own company, rather than as employees, so that they could take their income as dividends rather than salary.
There is also an issue around age which I guess relates to the way it is presented.
An important difference is that, unlike income tax, NICs is not levied on state or private pension income (but is levied on employee contributions to private pensions); furthermore, employees and the self-employed who continue working beyond the state pension age (SPA, currently 66) do not pay NICs on their earnings, though employer NICs is still payable.
Next comes the issue that it affects the poorest amongst us more than income tax.
an income tax rise would be slightly more progressive than a NICs rise because the threshold at which it starts to be paid is higher (£12,570 in 2021–22, compared with £9,568 for employee and self-employed NICs and £8,840 for employer NICs)
I think the relative raising on the income tax nil rate band has been a success of the last decade or so as it has taken some of the lower paid out of its grasp. So raising National Insurance would to some extent undo that. Also the IFS do not mention it but it fades out at the upper levels too. Whilst employer contributions continue unchanged we see employee ones fall to 2% over £50,270 per year at current rates.
If we look at tax revenue then according to the official numbers it was much better than last year in July.
Central government receipts in July 2021 were estimated to have been £70.0 billion, a £9.5 billion (or 15.6%) increase compared with July 2020. Of these receipts, tax revenue increased by £7.7 billion to £51.7 billion.
If we look back overall revenue has recovered pretty well.
Central government receipts in July 2019 decreased by £0.4 billion (or 0.5%) compared with July 2018, to £67.9 billion,
So it is not as some are claiming that we need tax revenue because it looks poor overall.
This issue if quite a hot potato to say the least and let me open with an issue that has rarely been pointed out. This ( and indeed many other) governments have used fiscal policy via extra spending so there was always going to be a type of rebalancing. Sticking to the UK there are issues of which two relatively immediate ones are what to do about the temporary rise in Universal Credit ( £20) and what to do about the Triple Lock for the basic state pension. This will boot the latter higher via the average earnings numbers I reported to the regulator back in March. So pensions may rise due to a number that is simply wrong.
The pensions link brings us to one of the issues around National Insurance which is that it stops at State Pension Age ( 66 and rising). Also that pensions do not pay it. So there is a fair bit to consider before we get to another plan to spend more. By the way that was always going to be the issue of being what some would call spendthrift, when and how do you stop? So far they are singing along with Queen.
I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me
Paying for it via National Insurance has a strength in that you get employers to contribute and whilst some may cut wages in response quite a bit of the bill would remain with them. But the problem is the way it impacts at lower wages and also the way it fades on employee contributions at the upper end.
So a penny on income tax rates seems to be fairer plus we could take the opportunity to nudge the National Insurance rate for higher earners up a bit as well as ending its upper age limit. A conceptual issue is that with ever more signs of the world economy slowing you would be raising taxes into that. That would be in addition to the tax rise announced in the last Budget.
In the 2021 Budget the Chancellor Rishi Sunak announced that the income tax personal allowance and the higher rate threshold would be frozen for four years from 2022/23 to 2025/26.
Finally a sign of how things can change is that there was a plan to raise the lower National Insurance threshold to the income tax one. Whatever happened to that?