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Pandemic Response Changes U.K. Tax Debate, MPs Told

Posted on June 4, 2020

The U.K. government’s response to the coronavirus pandemic has provided a reminder of “why we pay our taxes,” former U.K. Chancellor of the Exchequer George Osborne told the House of Commons Treasury Committee.

Along with two other former chancellors, Alistair Darling and Philip Hammond, Osborne gave evidence on June 3 to the committee’s inquiry into the economic impact of the crisis. The basic argument that if you want the protection of the state, you have to pay for it is “something left and right can agree on as we come out of this pandemic,” Osborne said.

Conservative member of Parliament Julie Marson asked for the witnesses’ views on government grants and loans, the merits of government investment in larger businesses, and whether conditions should be attached to that investment.

“I’m a bit skeptical about conditionality,” said Osborne, who is now editor of the London Evening Standard. “The reason we’re lending money to these businesses is that we have taken a deliberate choice to shut down our economy to tackle a pandemic. . . . The money we’re providing is a rescue, it’s a consequence of public policy, it’s not part of an industrial strategy. Once you start saying ‘this company has to be green, or this company director shouldn’t get a bonus,’ you’re into industrial policy.”

But attitudes to tax may change as a result of the coronavirus crisis, Osborne suggested. “I think there will be a sense that if you want the protection of the state, you need to pay your tax — either as an individual or as a company. I wrestled with trying to get the big international companies to pay more tax, and we had OECD agreements and so on; I know, for example, Philip [Hammond] tried to get self-employed people to pay more tax; I increased the tax on dividends for people who paid themselves through dividends,” he said. (Prior coverage of U.K. tax policy from 2017 and 2015.)

Osborne said, however, that he would not have canceled the planned April 2020 reduction in the main rate of corporation tax to 17 percent. He legislated for the change in Finance Act 2016, but Prime Minister Boris Johnson announced in November 2019 that the government would postpone further cuts “because we believe emphatically in fiscal prudence.” Osborne told the committee that going ahead with that change now would send “a big signal that Britain is open for business around the world.”

The essential challenge facing the government over the next year is how to withdraw some of the “very necessary schemes that have kept people in work and businesses afloat during the crisis,” Osborne said. “The furlough scheme has been absolutely essential for keeping people in work who otherwise would have been made unemployed, and many of the people on furlough are going to go back to their jobs.”

Given that some businesses “will not come back” and others will require fewer staff, Osborne argued that “trapping people on a scheme — that is generous to them in the short term, but prevents them reentering the labor force to get the job they need — is potentially very damaging.”

Osborne suggested that while some of the government-backed loan schemes are “essentially keeping zombie companies on life support,” HM Treasury should consider “a big act” of debt forgiveness. “After all, we lent to keep these companies going while we deliberately shut down the economy,” he said.

Conservative MP Felicity Buchan asked the witnesses to comment on the argument that tax cuts are needed to stimulate the U.K. economy, and the counterargument that tax increases should be considered because of the level of debt.

“I would be planning for all sorts of eventualities” in view of the current uncertainty, Darling said. “If you want to stimulate the economy, the most obvious thing to do is a time-limited VAT reduction,” he added. He was not sure that cutting income taxes would have much impact.

“When we’re on the path to recovery, we’re going to have very high debts, but one of the things a government like ours can do — we’re a large economy and no one doubts our creditworthiness — [is] we can actually carry that for some period,” Darling said, adding that “the best way of getting tax receipts is to get your economy going again.”

“I don’t think there’s any economic logic to increasing taxes in the short term,” Hammond said. “We all accept that the U.K., as a creditworthy, mature, very large economy, can carry more debt in the context of a short-term crisis. Of course, we have to remember that debt is cumulative. . . . Eventually, we’ll have to think about how we manage the challenge of debt in the long term.”

As the United Kingdom moves into the recovery phase, “there may be a need for some short-term fiscal stimulus, and that could be delivered most obviously through tax cuts,” Hammond said.

“We’re still in the crisis,” Osborne said. “The question then comes in the recovery — either through the discovery of a vaccine or a treatment, or [learning] to live as a society with the virus.” At that point, “two things are true,” he suggested. The country will be poorer than it would otherwise have been, and Parliament will have to judge what is “the right amount of money” to raise in taxes in order to fund public services, Osborne said. “We are going to have to confront as a nation the fact that . . . we’re going to have to raise more in revenue or spend less than we were planning. The second [point] is that we don’t know what’s going to happen next,” he said.

“You can talk as much as you like about taxing billionaires, and taxing tech companies and all those things — and it all adds up and helps — but the big money-raisers are your income taxes, your National Insurance [contributions], your VATs, those big central taxes that government relies on. . . . To say we’re just going to get the billionaires to pay for it is a cop-out from the real questions that governments in our position will have to confront,” Osborne said. (Prior coverage of the U.K. digital services tax.)

Committee Chair Mel Stride noted that the Conservative Party’s general election manifesto pledged no increase to the rates of income tax, National Insurance contributions, or VAT. “Is the party going to have to break the manifesto?” he asked. That pledge was described by Institute for Fiscal Studies Director Paul Johnson in November 2019 as “part of a fundamentally damaging narrative — that we can have the public services we want, with more money for health and pensions and schools — without paying for them.”

“The world [in which] the government was elected in December 2019 is completely different from the world of June 2020,” Osborne replied. “It’s going to be a different future.”

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