By Scott Simmonds, researcher at the TaxPayers’ Alliance
With public sector net borrowing totalling £36.1 billion in September, the financial difficulty the UK is storing up for future taxpayers cannot be ignored. Figures from the Office for Budget Responsibility show that the UK deficit so far has already topped £200 billion for the 2020-21 fiscal year, and we are only halfway through. To put that into perspective, that is £51 billion more than the total borrowing for the whole of the 2009-10 fiscal year - the peak of the financial crisis. This is a level of borrowing not seen since World War Two.
While many are relaxed about this due to extremely low interest rates - another aspect of the economy experiencing unprecedented levels - there is real cause for concern. The current base rate is 0.1 per cent, the lowest level ever seen in the United Kingdom. This is not sustainable in the long term.
Unless the United Kingdom wants to join only three countries in the world with negative interest rates, rates will only go up. Stress tests by HM Treasury found that a rise to 1 per cent would increase government borrowing costs by between £30-40 billion. This is equal to total Ministry of Defence spending in 2018-19.
To handle this debt, at the next Budget it is vital the government focuses on growing the economy as fast as possible. With the tax burden at a 50-year high it would be unwise to hamstring taxpayers and businesses with even more financial pain. While reductions in government spending should be a priority as soon as fiscal circumstances allow (for example, when we can wind down the covid support programmes), these should be combined with market friendly initiatives to rapidly accelerate economic growth.
Chancellor Rishi Sunak can find inspiration from our Australian cousins. As an Aussie myself, I follow developments Down Under and read with great interest the latest Australian federal budget. The administration has implemented some compelling examples for private sector led growth.
A personal income tax rate adjustment is the most eye-catching of the propositions. It’s part of a three stage plan to significantly simplify the income tax rates and allow workers to keep more of their hard-earned money. The gradual changes to the tax thresholds will eventually remove the 37 and 32.5 per cent tax brackets. Instead a 30 per cent tax rate will be applied to taxable income between A$45,001 (£25,000) and A$200,000 (£110,000) by 1 July 2024. The Australian government estimates that around 95 per cent of Australian taxpayers will face a marginal tax rate of 30 per cent or less in the 2024-25 tax year.
This level of tax cuts are impressive, with more than 7 million Australians set to receive $2,000 (£1,100) or more in tax relief this year alone. Combined with corporation tax reductions for medium and small businesses this provides encouragement and confidence for businesses throughout the country to grow and invest their way out of the coronavirus pandemic.
Simplification of the UK tax system has already been put forward by the TPA in The Single Income Tax report back in 2012. Notably, it called for overall taxes to be reduced to 33 per cent of national income. Australia is already leading the way - Australian taxes as a percentage of national income is 28.5 per cent, a full 6 percentage points lower than the UK rate of 34.5 per cent.
The Australian apprenticeship subsidy is another interesting idea. From 5 October 2020 to 30 September 2021, businesses who take on a new apprentice or trainee will be eligible for a 50 per cent wage subsidy of up to A$7000 (£3,820) per quarter, regardless of geographic location, occupation, industry or business size.
This is a time-limited policy coming out of the global coronavirus recession. The burden is shared 50/50 with private employers. Compare this to the UK government's Kickstart Scheme which is 100 per cent paid for by the taxpayer. The TaxPayers’ Alliance has criticised this scheme as ineffective and a stop-gap measure, instead recommending a cut in an employers’ national insurance jobs tax as a more viable solution and value for money.
Most apprenticeships in Australia run for four years, resulting in a licensed qualification when completed. The first year is seen as being the most burdensome for the employer as the apprentice is the most unproductive. This time-limited subsidy effectively halves the cost of apprentices’ wages in the first year, which can be seen as a way of helping reduce youth unemployment. These positives need to be weighed against the downside to such a policy, in that because it is age restricted, it runs the risk of being seen as interventionist and picking winners, as well as subsidising employment that may have happened anyway.
Overall the federal budget makes for interesting reading. Boris Johnson and Rishi Sunak should seriously consider some of the Australian government’s ideas and potentially implement an ‘Australian-style’ budget. Instead of a bloated budget full of government spending on big pet projects that usually overrun and overspend, why not invest in people? Let taxpayers keep more of their own money. They are the best judges of where to spend it.