By Guy Stenhouse
The UK Government has been remarkably effective in swiftly developing and implementing schemes to mitigate the economic effects of the coronavirus lockdown.
Rates relief, grant payments, the furlough scheme – all delivered rapidly and with no information technology meltdowns. The Bounce Back Loan Scheme has been a godsend for small businesses. Value-added tax reductions for the hospitality industry and even the initially sneered at Eat Out to Help Out scheme have been clearly beneficial.
Leaving aside the public health decisions, the Cummings stupidity and the exam fiasco (where both the UK and Scottish governments have spinelessly caved in to hysteria rather than defend standards) I would give the UK Government nine out of 10 for its handling of the economics of the coronavirus crisis.
Unfortunately, this success has been about spending money. Not just a little bit of money but a staggeringly large amount of money which has pushed our annual deficit and overall stock of debt relative to the size of our economy well beyond where they should be. Worse still the Bank of England has started to stray over the line where quantitative easing becomes outright funding of public spending by the Bank. This is dangerous territory for stable finances, the exchange rate and inflation.
There are those who say we must keep the financial taps on to deal with the economic effects of coronavirus. This is not a good idea – especially not for future generations who will pick up the bill. What we need to do is stop being so irrationally scared and get back to work.
We must not only stem the financial bleeding but reverse it. We should move in a relatively short period to raising more money than we spend. The wrong answer is to allow inflation to take hold – we have to deal with the problem the hard way but without choking off the recovery.
After the financial crisis in 2008 the policy pursued was some more tax but mainly it was spending reductions – austerity, which was spread very unevenly between spending department and across society. If we want to maintain social cohesion and decent public services more austerity is not the answer.
Taxes must rise but we need to be smarter and bolder about how we do it. Taxes on income currently strain at the limit of what is sustainable – somebody who earns £45,000 in Scotland has a marginal tax rate of well over 50% – too high already.
There are two areas we could tax more.
The first is to push us all in the direction of being greener and healthier. Sugar should be taxed, the fuel duty escalator should be restored, road tax should be based on weight to squeeze gas-guzzling leviathans off the streets. VAT on domestic fuel should be raised but with support for those in fuel poverty. There should be taxes on deliveries and on packaging which is not reusable. There are many ways in which sensible taxation spread widely could raise significant revenue as well as helping the “build back better” post-coronavirus agenda.
The second type of taxes which should be reformed and increased are those on capital. The decade to 2020 was the worst for real earnings growth for centuries but quantitative easing meant that those who already had wealth did much better. This imbalance is not right. Capital gains tax should tax only real rather than nominal gains but its rate should be doubled and those who have made a fortune out of their homes should have to contribute.
Inheritance tax is levied at far too high a rate but applies to only a tiny fraction of potential assets. The rate should be significantly lowered but tax should apply to all assets whenever they are transferred including if you leave the country to become resident abroad.
Chancellor Rishi Sunak has played a good hand so far but what he does next will be much more important.
Guy Stenhouse is a Scottish financial sector veteran who wrote formerly as Pinstripe
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