What the budget statement ought to say

By Prem Sikka

The UK government’s budget statement on 3rd March will shape the post-Covid society. The government needs to see beyond its neoliberal dogmas to build an equitable and just society.

Two issues should be off the table. Firstly, some neoliberals are obsessed with reducing government debt. But in the era of low interest rates and the government’s ability to selectively use qualitative easing to invest, that should not be a priority.

Secondly, there is also a misguided talk about increasing taxes on the masses. The government must resist that and there must be no increase in the basic rate of income tax or National Insurance Contributions.

In addition to investment in new industries, the key issue should be to support families, reduce inequalities and boost people’s spending power by taxing the rich and by eliminating or drastically reducing regressive taxes. The need for that should be obvious to anyone looking at social statistics.

Many households are reeling from the loss of income due to the impact of coronavirus. Unemployment is also rising. In January 2021, 726,000 fewer people were in payrolled employment compared with February 2020. Some 80% of these are workers under the age of 25. Some 4.7 million in work are furloughed. Unless the government announces a new support package for workers and businesses, unemployment will rise sharply as previous support schemes end. So the government has to devise a new Covid-support package.

Even in the pre-Covid era, large parts of UK population were struggling to make ends meet as the state-sponsored austerity and wage freezes deepened the social crisis. In the absence of strong trade unions and a manufacturing sector producing high levels of skilled and semi-skilled jobs, workers’ share of gross domestic product, in the form of wages and salaries, has declined from 65.1% in 1976 to 49.4% by the end of 2019.

Average wages have been stagnant for more than decade but income at the top end remains high. The High Pay Centre has reported that at FTSE 100 companies, the chief executive officer’s (CEO) remuneration was equivalent to the average wage of 70 workers. For FTSE 350 companies, the CEO/median employee pay ratio was 53:1 whilst at least a quarter of their workers received less than £20,000 per year on a full time equivalent basis.

Inevitably, poverty has risen. In 2019, some 14.5 million people, including 8.1 million people in working families, were living in poverty. Some 4.5 million children were living in poverty and the pre-Covid forecast was that the numbers would to rise to 5.2 million by 2022.

Household debt has increased. By January 2021, the household debt reached around £1,693 billion. The Financial Conduct Authority has stated that out of the UK population of around 68 million, 27.7 million adults are experiencing vulnerability to poor health, low financial resilience or recent negative life events. That is an increase of 15% since February 2020, when 24 million were considered to be vulnerable.

Regressive tax policies have sapped people’s financial resilience. For example, the Equality Trust has estimated that the poorest 10% of households paid on average 42% of their income in direct and indirect taxes, compared to 34.3% by the richest 10% of the households.  

The above evidence shows that people’s capacity to rebuild a sustainable capacity is severely depleted. We need a budget to improve people’s purchasing power, reduce inequalities and give people hope.

Here are some examples of what could be done.

Currently, earned income is taxed at a higher rate than unearned income, in the form of capital gains. Earned annual income between £12,500 and £50,000 is taxed in England at the rate of 20%. Income between £50,000 and £150,000 is taxed at 40% and anything above that is taxed at 45%. In sharp contrast, capital gains accruing from the sale of second homes, stocks and shares and artworks are taxed at rates varying from 10% to 28%. At the top end, that’s far below income tax.

This has incentivised accountants to convert income to capital gains. If wealthy individuals succeed, they can pay tax at 28% rather than at the marginal rate of 45%. By scrapping the tax concessions on capital gains and taxing them the same way as earned income, £14bn a year could be raised for redistribution.

The standard rate of Value Added Tax (VAT) must be reduced. The EU-recommended minimum rate of VAT was 15%, but successive governments opted for a higher rate. Since January 2011 it has been set at 20% and hurts the less well-off the most. Its reduction will make people’s money go further and may also persuade people to visit eerily silent town-centres.

A higher rate of VAT (30%) on luxury goods (artworks, expensive cars, yachts) could raise £1.6bn a year.

The 2011 hike in the VAT rate was accompanied by a move to shift taxes away from capital. In 2011 the rate of corporation tax was reduced to 26%, and reduced further to the present rate of 19%. Raising corporation tax by 1% would generate £3bn a year.

Companies like supermarkets, banks, insurance companies, online traders, for example, Amazon and eBay, tech companies, like Microsoft and Google, have done well during the pandemic and many have also benefitted from business rate relief and furloughed staff subsidies. The government can claw some of that back by levying windfall taxes on these companies.

A marginal income tax rate of 50% on annual incomes above £150,000 was introduced from April 2010, but in 2013 the Tory government replaced the 50% band with 45%. Such a move benefitted very few. The rich are in a position to pay more and the 50% marginal rate should be restored.

Of the 54 million adults, 31 million pay income tax,  so 23 million or 43% of adults do not pay income tax as they survive on annual income of less than £12,500, which is far less than the national minimum wage. Any tax-based incentive, such as raising tax-free personal allowances, does not help them at all. A universal basic income, set at a good level, can go a long towards alleviating poverty.

The poor, however, still make National Insurance Contributions (NIC), another regressive tax. Currently, employees generally pay 12% NIC on incomes between £6,240 and £50,000 a year. The NIC rate on incomes above £50,000 is 2%. Inevitably, the rich pay a lower proportion of their total income in NIC compared to the poor. This should be addressed by a graduated increase in the rate of NIC on incomes above £100,000.

The council tax is based on outdated property values and bears little relationship to the market value of the property or the ability of the individual to pay. A property worth £3 million or £350,000 pays virtually the same council tax. Consequently, the poorest tenth of the population pay 8% of their income in council tax, while the next 50% pay 4-5% and the richest 40% paying 2-3%. So the council tax must be reformed.

The government provides around £40bn a year tax relief on pension contributions to approved pension schemes. Most of it goes to individuals paying income tax at the rate of 40% and 45%. 10% of taxpayers, that is the highest earners, received 50% of the relief.

Others received little. Some 1.3 million individuals, the poorest, with earnings below the tax-free personal allowance receive no tax relief on their contributions to pension schemes. By giving everyone a tax credit of 20% on their pension contributions, the government will still have some £11bn left over for redistribution

The above could be supplemented by a modest level of financial transaction tax on selected transactions at rates ranging from 0.01% to 0.12% and can raise £8.8bn over a five year period. There is potential here to raise much more by including derivatives and other speculative transactions and taxing them at a higher rate.

Last year a study by the Wealth Tax Commission based at the London School of Economics and the University of Warwick estimated that by levying a one-off 5% wealth tax on personal wealth of over £500,000, the government can rise over £260bn. Indeed, the threshold can be higher and wealth tax would still generate revenues for redistribution and investment.

Finally, the government must clamp down on organised tax avoidance and evasion. HMRC states that last year it failed to collect around £31bn of taxes due to avoidance, evasion and errors. In previous years, the amounts were around £34bn-£35bn a year. Other studies estimate the amounts not collected to be between £58.6bn and £122bn a year. In the last decade, taxes of between £350bn and £1,200bn have not been collected. Greater investment in HMRC and curbing avoidance can pay high dividends.

The above are just some examples of how revenues can be raised to transform society. Any government seriously committed to “levelling-up” should embrace them.

Lord Prem Sikka is Emeritus Professor of Accounting, University of Essex. Twitter: https://twitter.com/premnsikka

Image by Harriet Pavey/ No 10 Downing Street, https://www.flickr.com/photos/number10gov/49647526566

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