A cautionary tale for the Chancellor


Category: General news

The Prime Minister promised to “spread opportunity to every corner of the UK with superb education, superb infrastructure, and technology”. No one could have foreseen the challenge his Government would have to overcome, nor the risk to children’s life chances that Covid would pose through school closures and the pressure it would put on existing infrastructure and technology.
As the vaccination rollout gains momentum now is the time for the Government’s words to turn into action. The Chancellor faces difficult choices to sort the public finances, but the task of levelling-up is also huge.

Typically the run up to Budget is dominated by discussion of what fiscal policy decisions will be made. Public sector net borrowing reached £270 billion in December, meanwhile tax receipts were £1.4 billion less than the previous year. People increasingly agree that the Treasury needs to start restoring the balance sheet, making up for levels of spending that are reminiscent of wartime Britain.
To this end, there has been speculation about an increase in Corporation tax, which currently sits at a highly competitive 19%. Proponents of raising the rate would argue the UK’s rate is considerably below other G7 countries meaning one could reasonably increase it without undermining our attractiveness. It is also the only major revenue raiser not protected by a manifesto commitment and the Chancellor could usefully offset some of the effects by raising capital allowances below the headline rate.

So when should the Treasury start raising taxes? Too soon and it could inhibit private sector investment, desperately needed to restore economic growth to pre-pandemic levels. Some have argued that to increase costs for businesses while the future still holds many uncertainties would be foolhardy. But difficult fiscal decisions are more easily made outside the sharp end of the electoral cycle.
And, where will the proposed tax changes have the greatest burden and how can we alleviate costs to households or businesses? We tend to think of taxes as spatially blind but in fact they have markedly different effects in different places. Human behaviour, property prices, business activity, access to reliable public infrastructure like transport systems, all impact the level of tax individuals pay and these factors are not evenly distributed across the UK.

As Onward research recently showed, different tax decisions by the Chancellor in March could significantly hinder – or help – his levelling up agenda. London contributes £1 in every £5 in tax receipts, yet as a share of regional GDP London is the lowest contributor to the Exchequer at 33%, partly because it benefits from large numbers of commuters to boost output. If one goes further and looks at specific taxes, as the Onward report does, the picture is revealing.

Taking another look at Corporation tax, London contributes £2,071 per head, this is £1,642 more than the average individual in the North East contributes. A similar picture is presented across all taxes linked to economic activity, for example business rates and income tax. Raising these taxes would be broadly regionally progressive. The burden would disproportionately affect richer regions.
But looking at other taxes like council tax, the opposite is true. London contributes the lowest level of council tax of any region by every measure. Where households in the North West pay on average £507 per capita, Londoners pay just £481. Of 10% of the cheapest local authorities in England for council tax, 71% of these are London boroughs – despite surging house prices and higher levels of wealth in the capital. This analysis shows us that tax burdens are not felt evenly across the UK by any means and this is not explained away by levels of regional GDP.

We see a similar story with other types of tax. For example fuel duty, environmental levies and so-called sin taxes, like alcohol and tobacco duties, are disproportionately borne by the poorest regions of the country, because people and businesses behave differently to richer areas. This is not an argument against those taxes but it should be a cautionary tale for the Chancellor. He will struggle to level up poorer places with spending if he is simultaneously holding them back with the tax system.

The Government has understandably not made as much progress on levelling up as it would have wished because of the COVID-19 crisis. But as we look to the future and the road to recovery, it would be wise for the Chancellor to combine his efforts to level up the country and repair the balance sheet. Considering the effect any tax changes will have on regional economies would be a good start.

By Francesca Fraser.
Francesca Fraser is a Researcher at the thinktank Onward. The report, Levelling up the Tax System, was published on Monday 18th January and is available at www.ukonward.com/levellinguptax/

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