Budget is not time for tax rises, warns cross-party MPs’ report

‘Unsustainable’ finances mean government will eventually need ‘significant’ extra revenues, committee warns

Andrew Woodcock
Political Editor
Monday 01 March 2021 07:13
Rishi Sunak hints at tax rises in Budget next week

Wednesday’s Budget is not the time for tax increases or measures to rein in public spending in response to soaring debt, an influential cross-party committee of MPs has warned.

The chancellor, Rishi Sunak, has said he wants to use the 3 March statement to “level” with voters about the need to address the UK’s £2 trillion national debt, and he is widely expected to start raising money by hiking corporation tax and freezing income tax thresholds so more people move into higher bands as their earnings rise.

Today’s report by the House of Commons Treasury Committee acknowledged that the UK’s public finances are currently on an “unsustainable long-term trajectory”, not only because of the £280bn cost of coronavirus support measures, but also because of the growing burden of an ageing population.

But it warned the chancellor that immediate fiscal consolidation measures – tax rises or public spending cuts – could undermine the economic recovery from lockdown.

In the longer term, however, it concluded that “significant” fiscal measures will be needed, putting “significant pressure” on the commitment in the Conservatives’ 2019 manifesto not to raise the rates of its three main sources of revenue – income tax, national insurance or VAT – before the next election.

The committee’s chair, Conservative former Treasury minister Mel Stride, said the report was agreed unanimously by all 11 members, made up of six Tories, four Labour MPs and one from the Scottish National Party.

“Tax is often an area of significant disagreement between parties, so I am particularly pleased that the cross-party Treasury Committee has unanimously agreed this report for our Tax After Coronavirus inquiry,” said Mr Stride.

“With our public finances on an unsustainable long-term trajectory, our clear message is that Budget 2021 is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. But we will probably need to see significant fiscal measures, including revenue-raising, in the future.”

The committee called on the government to develop a “clear tax strategy” for reform to allow future administrations to raise revenue in ways which minimise economic damage while supporting public services and promoting growth.

The report found that any effort to raise revenues quickly and at a large scale is likely to require more cash to be raised from one or more ofincome tax, national insurance, and VAT. 

While the manifesto’s “triple tax lock” rules out changes in the rates of these taxes, the government has left itself leeway to freeze thresholds, which would raise money with “minimum economic distortion”, it said.

Increases in national insurance contributions would be “especially difficult” because of the impact on jobs, but a “moderate” increase in corporation tax could raise money without damaging growth, the committee found.

Proposals for a windfall tax on companies which have done well out of the pandemic would be “problematic” though not impossible, but the committee would not recommend the introduction of an annual wealth tax on property and assets, the report said.

It called for urgent reform of pension tax relief, which costs £20.4bn a year, much of which goes to the highest-earning sector of society.

And it said stamp duty on property transactions is “economically inefficient” and should be a priority for reform.

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