We have issued a report today calling for greater clarity over the tax policies of the main political parties. Backed with an open letter in the national press, the report urges that, should it become inevitable that there will be a need for tax increases, in tandem with spending cuts, due to the ongoing size of the national deficit, now is the time for the main political parties to break the silence over where tax increases might be – and comes in the same week that Alistair Darling has said there should be more openness over potential spending cuts.
The report – called Time to break the silence? – shows that hard decisions need to be made about the best way to address the scale of the Government’s £175 billion fiscal deficit. All the political parties are more than aware of this; however there is currently very little debate about key taxation policies which will affect UK business, with the three main political parties seemingly preferring not to show their hand until only a few weeks before the General Election.
Our prudent assumption is that an additional £25 billion tax revenues will be needed for Treasury coffers, tax increases of £9 billion have been identified as being acceptable to all parties. The extra £16 billion necessary has been split in our report consistent with the background political policy thinking (see chart below).
The Conservative Party has already expressed its concern about what it believes to be the damagingly high rate of corporation tax when compared to the UK’s European and international competitors. It is not unreasonable to infer that they would view many other increases in direct taxation in much the same way.
If previous behaviour is a guide to any potential future steps they make take, then indirect taxes are a strong candidate for a potential Conservative Government’s taxation agenda.
The standard rate of VAT was increased by almost ten percentage points (from 8 per cent to 17.5 per cent) under the previous Conservative administrations. An increase of 2.5 percentage points by a future Chancellor would not seem out of the question. Indeed, a VAT rate of 20 per cent would be comparable to many of the UK’s European neighbours and would raise an additional £12bn. Other possible areas in the VAT area might include the full imposition of VAT on books and magazines but this and similar reforms would inevitably be more controversial. The Conservatives have given prominence to their commitment to introducing measures aimed at cutting greenhouse gas emissions. There are a number of existing green taxes and levies including air passenger duty, landfill tax, the climate change levy and the aggregates levy. It is reasonable to assume that a Conservative administration would fulfil their stated commitment by increasing those green taxes by, perhaps, 25 per cent above the rate of inflation.
A more politically controversial step, but one that would have a green rationale, would be an increase in the reduced rate of VAT payable on domestic fuel bills. These are currently set at five per cent. Increasing them to nine per cent would yield an additional £1bn in revenue.
Over the next two Talk Shops I will discuss the policies of the Lib Dems and the Labour party.
If you would like a full copy of the report or further information please have a look at the micro-site: http://www.breakingthesilence.bdo.uk.com/