Experts in the UK have warned that the biggest cuts seen for 65 years are now necessary in most government departments - up to 25 per cent reduction in budgets may be necessary. Chancellor George Osborne is preparing to unveil the first tranche, worth £6 billion, next week but cuts alone are unlikely be sufficient to deal with the deficit - the national debt is now more than £2 trillion - so how will he raise more money?
Some options are increases in Income Tax, National Insurance and VAT. Because these three taxes bring in most of the government’s revenue, at least one of them is likely to be considered:
- Income Tax increases for those with higher incomes, such as the recent addition of the top rate of 50%, may be considered but the size of the problem may call for a more general increase in rates. The latter would be undoubtedly be attacked by political opponents but the effect could be reduced, significantly for the lower paid, by an increase in the personal allowance. Given the size of the debt the Chancellor may nontheless see this potentially unpopular move as essential.
- Raising the National Insurance contribution for employers and/or employees is another option. Whereas income tax is a levy on all taxable income, National Insurance only applies to earned income - salaries and wages as opposed to income from savings and investments - and is used to pay for state pensions and other state benefits. Given the increasing cost of providing for the sick, the old and the unemployed this would be a logical move but increasing, for example, employer contributions could be seen as counter-productive as the country struggles to climb out of recesssion.
- Increases in VAT rates are limited by the EU but UK rates are currently below the maximum permissible and would be a prime target. Included in the quoted price on most goods and services, it is not immediately obvious where a price increase is the direct result of an increase in the tax due on the sale. Nonetheless VAT is an indiscriminate tax, in that it is paid by everyone who buys goods or services in the UK, and this can be regarded as either a good or bad thing depending on one's point of view. On the one hand, VAT is paid by anyone who makes a purchase and therefore affects both rich and poor. On the other hand it could be viewed as 'means-related' - the more purchases a person makes, the more tax is collected from that person. A further factor is that it allows tax to be collected from non-residents and visitors who also pay VAT on most goods and services purchased in the UK.
The bottom line is that there is no easy solution and whichever combination the Chancellor chooses will be unpopular with at least some of the population. However, whatever he decides, he will certainly also be seeking to increase the effective receipts from taxation of all types; the pressure on tax authorities and lawmakers to eliminate tax evasion and minimise tax avoidance will continue.
