TaxAAM Tax rises

Tax rises around the corner?

As the fiscal impact of the Covid-19 pandemic begins to bite, the focus is beginning to shift to how the enormous cost is to be covered in future.

In the UK, for example, raising taxes or imposing a public sector wage freeze are among the options on the table to pay for a government borrowing boom during the coronavirus pandemic, according to a leaked Treasury document. The internal report estimated Britain’s budget deficit – the gap between government income and expenditure – is on course to hit £337bn this year after a dramatic increase in public spending to cushion the economic fallout from the disease, while tax income has been eviscerated by lockdown measures.

In the document outlining the potential costs for the public purse, revealed by the Daily Telegraph, Treasury advisers outlined a package of potential policy measures for the chancellor, Rishi Sunak, to consider. The internal predictions for a deficit this year of £337bn are roughly in line with estimates made by the Treasury’s independent economics forecaster, the Office for Budget Responsibility, which had pencilled in borrowing of £273bn this year. 

The deficit had been expected to be about £55bn this year before the pandemic struck. Sunak has previously warned the impact to the public purse is expected to be significant. The government has so far refused to give more detail into the costs of its support schemes or how it intends to pay for them. However, ministers are focusing on responding to the crisis first before setting out a budget plan later in the year. Among the options Sunak could consider are:

1. Austerity

The most controversial option would be to relaunch an austerity drive by cutting government spending. According to the Telegraph, the Treasury report suggests a two-year public sector pay freeze could generate savings of £6.5bn by 2023-24.

2. Tax rises

The Treasury document suggests a wide-ranging approach that would include breaking the Tory’s “triple tax lock” promise not to raise income tax, national insurance or VAT, which was made before the election.

3. Growth

The chancellor has suggested he would prefer to grow the economy as the primary means of cutting the deficit. Budget deficits are influenced by two factors: government spending and tax income. But, at present, tax income has slumped because the economy has been broadly at a standstill.

4. Borrowing

The Treasury report warned the UK could face a sovereign debt crisis – where government borrowing costs become ruinously expensive – unless the economy recovers quickly, in an echo of the warnings Osborne made during the 2008 financial crisis.

With the spectre of increasing taxation, it is increasingly important that we structure our savings to maximise tax efficiency and protect against the worst of tax rises.

Important information

This article is intended for general circulation and information purposes only.  It may not be published, circulated, reproduced or distributed in whole or part to any other person without prior consent of AAM. This article should not be construed as an offer, solicitation of an offer, a recommendation or provision of financial advice. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser before making any decisions. Whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this article is subject to change without notice. AAM advisory Pte Ltd is licensed by the Monetary Authority of Singapore, FA Licence no 100032.

Book a complimentary financial review with one of our wealth managers.