Taxing issues: Budget 2016

Dr Dimitris Andriosopoulos reflects on yesterday’s Budget announcements, and notes that while the changes in personal tax rate thresholds are welcome, simplifying the entire tax system needs to be addressed, and he asks if austerity is the way forward.

Chancellor George Osborne delivered yesterday’s Budget which included the inevitable good and bad news. Depending on your personal circumstances it might have been a case for a small celebration or that sinking feeling – or maybe a bit of both.

Amongst the many announcements which have dominated social media and produced reams of column inches in today’s papers, a few key financial ones are that the personal allowance is to rise to £11,500, and the 40% tax rate threshold will go up to £45k from April 2017 (though that might not end up being implemented in Scotland – that will be decided when Scotland gains the power to set its own rate of income tax in 2017.)

The fact the Chancellor has raised the personal tax allowance and the higher tax rate threshold to £45,000 is a move that is certainly welcome as it reduces the effective tax the lower, mid- and higher-level income earners will pay. This is very important as until recently the top 10% of earners have borne approximately 60% and almost double the total tax paid to HMRC by the top 1% of earners.

Nevertheless the big issue of simplifying the tax system remains wanting, something that is definitely challenging but can be life-changing in terms of tax revenues and policy setting. The UK should push for a tax system that is harmonised across the EU and aim to close the tax loopholes that allow for swathes of revenues and cash to go untaxed.

The Chancellor (in)directly admitted he did not deliver on some of the fiscal promises made in the past. However, savings on services and cuts on public spending should not focus on just making cuts across the board but on optimal and efficient allocation of resources and more efficient use of national services without over-feeding the private sector that oftentimes provides the same services the state delivers but the private sector still sends a higher bill. This brings me to my next and more important point.

Over the past few years fiscal austerity has become a doctrine without looking at alternatives and the implications of too much austerity. There must be a radical shift from pointing to debt as the root of all evil. The private sector knows that debt is one of the main sources of getting capital in order to invest and grow one’s business. Therefore, the government should maintain a close eye on minimising costs of existing services but at the same time increase its borrowing that will be invested on targeted and specific infrastructure projects. Investment in such projects will improve the efficiency of existing economic activity, reduce existing costs of doing business and spur new economic activities, ideas and commercialisation. For instance, the quarterly average 10-year government yields (also known as cost of borrowing) is 1.68%, the lowest since 1984 (Data taken from the Bank of England).

Moreover, the UK government is facing its lowest monthly average 10-year government yields which is currently at 1.50% (Data taken from the Bank of England). This means that the government can increase its borrowing at a very low cost and spend on infrastructure projects that will give a much needed boost in the economy (thus potentially maintaining a similar ratio of debt to GDP), especially now when the global economy is anaemic. This would provide a solid economic improvement on the national economy with the associated positive economic ripple effects on the regional and local communities. To address any scepticism for increasing debt levels, the government can look into raising debt for financing specific national or Public-Private joint ventures that will allow for raising capital but with a lower increase in national debt.