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Post Covid changes to taxation and spending

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bramling

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Having had a couple of heated discussions on Facebook about the implications of what’s gone on this year, I was wondering what people think is most likely to happen in 2021 in relation to the consequences for the public finances. In other words, what do we think Sunak is going to do from a taxation perspective, and from a spending perspective?

I’m not really interested in thoughts as to what *should* happen, more thoughts as to what people think *will* happen.

I’m guessing there could well be a bit of a raid on some indirect taxes, capital gains keeps being mentioned for example.
 
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brad465

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While we've seen the thought of public sector pay freezes in the news today, I feel like if Sunak is really interested in becoming the next PM he'll want to hold out for as long as possible so he remains popular enough to be elected in a potential leadership change many are predicting early next year. He'll hope any sweeping changes will be the responsibility of a hypothetical chancellor he appoints.

As for measures that might come in, income tax increases in some form or another will likely happen before the next election, but many are advising not to bring them in while the economy is still down in the dumps. He might be able to get away with a personal allowance freeze and other tax thresholds in 2021 though.
 

bramling

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While we've seen the thought of public sector pay freezes in the news today, I feel like if Sunak is really interested in becoming the next PM he'll want to hold out for as long as possible so he remains popular enough to be elected in a potential leadership change many are predicting early next year. He'll hope any sweeping changes will be the responsibility of a hypothetical chancellor he appoints.

As for measures that might come in, income tax increases in some form or another will likely happen before the next election, but many are advising not to bring them in while the economy is still down in the dumps. He might be able to get away with a personal allowance freeze and other tax thresholds in 2021 though.

Good point about Sunak not wanting to bust his popularity too soon. However if the rumours about Boris being gone within 6 months are true then this could presumably still leave room for some tax rises to be dumped on the next chancellor as early as next spring.
 

MikeWM

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On spending, it seems the logical thing to do would be a Keynesian approach of spending and investment rather than a return to austerity, certainly for a few years - especially while interest rates remain at historic lows. But this government never seems to do anything logical, so that's probably not going to happen.

On tax, it seems that discretionary spending is inevitably going to be massively reduced - many people will no longer have jobs; those that still do will probably be prioritising 'security' over more frivolous items (eg. paying the mortgage, or moving to a better location, or building up a nest egg to survive the insane over-reaction to the next virus to come our way...) Tax rises will only compound that issue - and so that's probably exactly what they'll do.

I don't object to tax rises in some cases - I voted Labour at the last election after all - but the idea of having tax rises that will probably affect me, in order to pay for the cost of this total insanity, really makes me irritated.
 

hwl

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As for measures that might come in, income tax increases in some form or another will likely happen before the next election, but many are advising not to bring them in while the economy is still down in the dumps. He might be able to get away with a personal allowance freeze and other tax thresholds in 2021 though.
Anything other than minor tax changes (not just income) would be very damaging in 2021, hence I'd suggest they will hold off till 2022 and see how well the economy has recovered and which parts haven't compared to other bits.

In terms of big revenue blackholes that will need filling by other means:
1. Corporation tax reduction due to brexit and financial service relocation some of their activities
2. Business rates (valuations imploding due to commercial rental values collapsing (retail and restaurant rates implosion was already ton the cards pre-Covid)
3. Fuel taxes (duty and VAT) reducing petrol and diesel use with more electric cars - road pricing was dusted of the shelf again this week by the government.

There were plenty of problems penciled in pre-covid and then there are the covid impacts.
 

bramling

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Anything other than minor tax changes (not just income) would be very damaging in 2021, hence I'd suggest they will hold off till 2022 and see how well the economy has recovered and which parts haven't compared to other bits.

In terms of big revenue blackholes that will need filling by other means:
1. Corporation tax reduction due to brexit and financial service relocation some of their activities
2. Business rates (valuations imploding due to commercial rental values collapsing (retail and restaurant rates implosion was already ton the cards pre-Covid)
3. Fuel taxes (duty and VAT) reducing petrol and diesel use with more electric cars - road pricing was dusted of the shelf again this week by the government.

There were plenty of problems penciled in pre-covid and then there are the covid impacts.

It seems there’s already a backlash over the public sector pay freeze. Sunak isn’t going to be popular next year, very hard to sell a pay freeze to people who have worked right through.
 

Chester1

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While we've seen the thought of public sector pay freezes in the news today, I feel like if Sunak is really interested in becoming the next PM he'll want to hold out for as long as possible so he remains popular enough to be elected in a potential leadership change many are predicting early next year. He'll hope any sweeping changes will be the responsibility of a hypothetical chancellor he appoints.

As for measures that might come in, income tax increases in some form or another will likely happen before the next election, but many are advising not to bring them in while the economy is still down in the dumps. He might be able to get away with a personal allowance freeze and other tax thresholds in 2021 though.

I don't think there is any chance of the income tax thresholds for England increasing anytime soon. That will claw back a bit but not a huge amount. One option could be to reduce National insurance from 12.8% to 10% but increase the basic rate of income tax from 20% to 22.8%. With NI and basic rate income tax thresholds being equal it wouldn't change the take home pay of working people but would increase income tax a bit for pensioners (who don't pay NI). Normally pensioners would be in revolt but I think the government could get away with a modest increase in the current circumstances. This could be matched with cutting tax relief on pension contributions to basic rate relief only. Few people who get tax relief at 40% are then taxed at 40% taking their pension (i.e. have pension income of £50,000+). Its a £20bn per year bung to the better off part of the middle class. Those three changes would keep the combined rate of income tax and NI for workers at the same level but skim off an extra £30bn+ a year. Combined with some small increases elsewhere it would probably be sufficient to plug the gap.

Good point about Sunak not wanting to bust his popularity too soon. However if the rumours about Boris being gone within 6 months are true then this could presumably still leave room for some tax rises to be dumped on the next chancellor as early as next spring.

It seems there’s already a backlash over the public sector pay freeze. Sunak isn’t going to be popular next year, very hard to sell a pay freeze to people who have worked right through.

There is no chance of any significant spending cuts or tax increases for next financial year. The economy won't be in a position to take it. April 2022-23 and April 23-24 will be the years when spending cuts and tax rises take place.

There is a myth that the money borrowed this year will need to be paid back. Its quantitative easing money borrowed from the Bank of England so it will never be repaid nor interest paid on the debt. We will "pay" for it through higher inflation stretched over several years. Changes to spending and taxes will be to plug the tax-spend deficit once quantitative easing stops.
 

HSTEd

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The obvious example is to freeze station pensions, that saves at least £3bn per year every year that the freeze remains in place.
 

Bald Rick

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I agree with @hwl that he won’t do anything drastic on taxes or spending until the end of 2021. But when it does come I think there will be quite a few avenues:

* ending the state pension triple lock, to bring it to CPI only
* fuel duty raised, possibly by a fair bit, sold as part of an encouragement to switch to electric #
* higher rate and additional rate tax earnings limits frozen
* CGT lifted to income tax levels, and scope widened
* changes in pension tax relief

And closer to home, I’m sure there will be reductions in the rail budget.

Some wild cards:

* raising corporation tax rates
* VAT scope widened, including lifting the rate to the standard level on gas (worth £1.5bn pa alone)
* NI rates lifted, possibly for higher rate tax payers only, sold as ‘paying back the NHS’

# putting 10p a litre on fuel would raise £5bn a year. Given that fuel is currently 12-15p cheaper than it was in February, that doesn’t seem unreasonable.
 
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Chester1

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The obvious example is to freeze station pensions, that saves at least £3bn per year every year that the freeze remains in place.

Thats not going to happen. That would hit all pensioners, including those who are poor. That would cause anger across the political spectrum. Something like increasing income tax but decreasing NI by a corresponding amount or a introducing a social care insurance/tax would be better. Currently workers pay a combined income tax rate of 32.8% between £12,500 and £50,000 while pensioners only pay 20% because they don't pay NI. The latter hasn't been insurance for 75 years, its just a second income tax and therefore pensioners should pay it or an equivalent. It would be less politcially toxic to introduce a social care tax of 3-4% for pension income above £12,500 than freeze the state pension.
 

hwl

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It seems there’s already a backlash over the public sector pay freeze. Sunak isn’t going to be popular next year, very hard to sell a pay freeze to people who have worked right through.
Plenty in the private sector have worked right through as well and also won't see any pay rise either (potentially cuts in the private sector too).
 

Bald Rick

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Plenty in the private sector have worked right through as well and also won't see any pay rise either (potentially cuts in the private sector too).

Plenty in the private sector have had pay cuts.
 

hwl

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I agree with @hwl that he won’t do anything drastic on taxes or spending until the end of 2021. But when it does come I think there will be quite a few avenues:

* ending the state pension triple lock, to bring it to CPI only
* fuel duty raised, possibly by a fair bit, sold as part of an encouragement to switch to electric #
* higher rate and additional rate tax earnings limits frozen
* CGT lifted to income tax levels, and scope widened
* changes in pension tax relief

And closer to home, I’m sure there will be reductions in the rail budget.

Some wild cards:

* raising corporation tax rates
* VAT scope widened, including lifting the rate to the standard level on gas
* NI rates lifted, possibly for higher rate tax payers only, sold as ‘paying back the NHS’

# putting 10p a litre on fuel would raise £5bn a year. Given that fuel is currently 12-15p cheaper than it was in February, that doesn’t seem unreasonable.
I'd agree with most of that as target areas.
I few thoughts:
a) fuel duty this might be the time to deploy a shift from volumetric to energy content basis (HMRC have been toying with the idea on and off for a very long time but the freeze prevents them doing anything) which would close the user cost gap between petrol and diesel, which would be bad of diesel but good for air quality and encourage more petrol /petrol hydrid /petrol range extender purchases in the long term (this would also avoid screwing up any road building schemes which increase vehicle usage as Petrol has very little effect on NOx totals so no major NOx TAG / green book increases for road schemes)
b) CGT - they have been closing lots of loopholes gradually since the Osborne era so any raises there should well bring in significantly higher revenues than many observes expect. Many (former) landlords could get unexpected bills when reducing their portfolios, huge CGT avoidance in this area.
c) pensions tax relief - they need to be careful or else they will create many problems in the future, recent (last decade) changes in RoI illustrate this
d) I can see a small corp tax rise
e) the VAT on gas, sold on the basis of funding energy efficiency /hydrogen injection programmes as well as encouraging usage reduction.
f) the general IT / NI misalignment mess needs sorting out which makes many potential NI changes very difficult, a crisis this big provides a once in generation opportunity to do that

Plenty in the private sector have had pay cuts.
Agreed I know plenty through mostly in non key areas (so far).

Reduced turnover and more company tax take will lead to more of this over the next few years.

Plenty in the private sector haven’t been keeping GB Ltd operational.
But some have and many who were employed in the private sector are now unemployed or might be in the near future.
 
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Chester1

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And also do not have the benefits of the public sector pension. Perhaps the government could make savings there.

If it makes savings there then it will have a recruitment crisis. Its one of the main reasons people stay in the civil service and the government is almost unique in being able to make life time defined benefit commitments. If the government decides its necessary to reduce civil service staffing costs then a pay freeze and moving jobs out of London is a much better option. Civil Service pensions were reformed by the coalition replacing final salary from 60 with career average from state pension age. Its only older staff who have the former and only those who are very close to retirement who can make additional contributions to classic pensions.
 

bramling

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Plenty in the private sector have worked right through as well and also won't see any pay rise either (potentially cuts in the private sector too).

Which isn't really relevant, as that's not within the government's control, whereas public-sector pay is. So the whole clapping thing was essentially a false facade.

I'm just watching Sunak on Sky News now. Not a particularly impressive performance in my opinion, and food for thought for anyone who really thinks this individual is material for being next PM. He's already made a clumsy mistake with eat out to help out, which does seem to coincide with when this latest "wave" seemed to pick up.
 

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I'm just watching Sunak on Sky News now. Not a particularly impressive performance in my opinion, and food for thought for anyone who really thinks this individual is material for being next PM. He's already made a clumsy mistake with eat out to help out, which does seem to coincide with when this latest "wave" seemed to pick up.

Lots of people seem to have forgotten he only became Chancellor because he was the highest placed yes-man once Javid had the balls to say no to Cummings, and that the only thing of note that he's done in his chancellorship was to hand out free money

I remember him being in one of the debates leading up to last year's election and my tory voting then-housemate was decidedly unimpressed by his performance then. Admittedly he was up against Richard Burgon so he still managed to look halfway competent, but still..
 

Bald Rick

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eat out to help out, which does seem to coincide with when this latest "wave" seemed to pick up.

The second wave has a pretty strong correlation to schools and colleges going back, which is why Scotland had theirs three weeks before England and Wales, and why cities with a large proportion of university population had some very high rates
 

bramling

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The second wave has a pretty strong correlation to schools and colleges going back, which is why Scotland had theirs three weeks before England and Wales, and why cities with a large proportion of university population had some very high rates

I thought things started kicking off (in England) at the end of August / very beginning of September, which would surely be slightly early for schools, and more so for universities?

Not disputing that education is probably the biggest issue, however I can't help but remember driving home on those Monday, Tuesday and Wednesday evenings in late August and seeing pubs and restaurants literally full to bursting. Likewise a work colleague who owns a pub/restaurant as a second occupation made it very clear they had a very difficult week at the end of August, which coincided with reasonable weather and the bank holiday - they didn't want to be part of the scheme but felt pressurised into it.

I don't think it was the main factor, but it certainly can't have helped. It's pretty ridiculous to go from that to heavy restrictions, in the space of a few weeks.
 

Bald Rick

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I thought things started kicking off (in England) at the end of August / very beginning of September, which would surely be slightly early for schools, and more so for universities?

Not disputing that education is probably the biggest issue, however I can't help but remember driving home on those Monday, Tuesday and Wednesday evenings in late August and seeing pubs and restaurants literally full to bursting. Likewise a work colleague who owns a pub/restaurant as a second occupation made it very clear they had a very difficult week at the end of August, which coincided with reasonable weather and the bank holiday - they didn't want to be part of the scheme but felt pressurised into it.

I don't think it was the main factor, but it certainly can't have helped. It's pretty ridiculous to go from that to heavy restrictions, in the space of a few weeks.

The infection rates troughed around the end of July, and started picking up again, slowly from then. This correlates closely with the easing of restrictions that occurred in early/mid July. The rate then rises, slowly through August, before taking off rapidly from Mid Sept. in Scotland, it happened a couple of weeks earlier.

No doubt that people meeting up in pubs etc was a factor in all of that, but I think the eat out to help out scheme was only a small factor. The pubs I saw were much busier at the weekend when the scheme didn’t apply.
 

bramling

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The pubs I saw were much busier at the weekend when the scheme didn’t apply.

That wasn't my observation. I saw car parks packed to overflowing on the EOTHO nights, then empty for the remainder of the week. My normal indian restaurant reported the same. I remember one week getting stuck in traffic in north London on all three nights of the scheme, which at that time of night is certainly not a normal experience, in fact I can't recall another time that's ever happened.
 

greyman42

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Not disputing that education is probably the biggest issue, however I can't help but remember driving home on those Monday, Tuesday and Wednesday evenings in late August and seeing pubs and restaurants literally full to bursting.
I think your idea and my idea of "full to bursting" may be two different things. Sorry for going off topic.
 
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AndyY

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c) pensions tax relief - they need to be careful or else they will create many problems in the future, recent (last decade) changes in RoI illustrate this

Agreed. I am uncomfortable with the idea of increasing tax and reducing NI. When basic rate taxpayers pay into their pensions, they get 20% tax credit, but remember that income tax is paid on withdrawal. If income tax is increased and higher rate relief is completely withdrawn, it may deter further pension contributions.
 

LAX54

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VAT will not be subject to EU rules, so that could be an option to raise, and also either no increase in income tax allowance, and/or a slight rise in how much you pay, rest assured we will pay it all !
 

wireforever

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Sunak as a tory chancellor will have to eventually make some unpopular decisions re tax etc.At least we don't have the 3 stooges still running the country Cameron Clegg and Osborne.What would they have done arrogant Osborne would have probably done nothing due to his austerity mantra and let millions of people lose their jobs
 

greyman42

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Sunak as a tory chancellor will have to eventually make some unpopular decisions re tax etc.At least we don't have the 3 stooges still running the country Cameron Clegg and Osborne.What would they have done arrogant Osborne would have probably done nothing due to his austerity mantra and let millions of people lose their jobs
The way Johnson and SAGE are going on with lockdowns and tighter tiers, millions are still going to loose their jobs despite the efforts of Sunak.
 

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The way Johnson and SAGE are going on with lockdowns and tighter tiers, millions are still going to loose their jobs despite the efforts of Sunak.

I really don’t understand it, they’ve spent billions of pounds supporting jobs only to continue the economic destruction that will see many of these jobs lost eventually anyway. It’s senseless. This kind of thing makes me question their motive, nobody can be this incompetent surely?!
 

Mojo

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I really don’t understand it, they’ve spent billions of pounds supporting jobs only to continue the economic destruction that will see many of these jobs lost eventually anyway. It’s senseless. This kind of thing makes me question their motive, nobody can be this incompetent surely?!
Pushing the problem down the line. Attempting to make it somebody else's problem and get someone else to take the blame for the inevitable austerity and tax rises that will follow. In reality; it's not their problem, it's our problem.
 
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