MNI INTERVIEW: UK Fiscal Gap Needs Simple Tax Hikes - King

UK Chancellor of the Exchequer Rachel Reeves should implement a smaller number of broader tax rises rather than many smaller ones to credibly build up fiscal headroom in her Nov 26 budget, the Office for Budget Responsibility’s former chief of staff Andy King told MNI.

A two-percentage-point rise in the basic rate of income tax, offset by a two-percentage-point cut in the basic rate of national insurance plus extending the personal tax threshold freeze would close more than half of the estimated GBP20-30 billion gap, King said in an interview, adding that it would be harder to forecast revenue from a raft of smaller measures.

“Already there were GBP40 billion of tax increases last year that involved over GBP20 billion from one large measure, and then lots of small tax measures. To repeat that small-measures approach becomes increasingly risky,” King said.

“There are those in the Treasury with very long memories who are quite scarred by having been part of budget 2012, the omnishambles budget, where attempts were made to stack up lots and lots and lots of small measures to cover the cost of other things going on in that budget, who will always advise against doing lots of purely small measures.”

Speculation has mounted that Reeves will make major tax changes at the Nov 26 budget, after reversing planned cuts to welfare spending and ahead of an expected downgrade to the OBR’s GDP and trend growth forecasts, with its estimate of trend productivity growth expected to be cut by 0.3 percentage point. (See MNI INTERVIEW: OBR To Cut Trend GDP, Make UK Fiscal Job Harder)

“I'm sure they will try to close some of the gap through positive supply side impacts, but I think it would be very difficult, not least because a tax-raising budget is likely to be negative for growth," King said. (See MNI: UK Budget Should Double Headroom - Resolution Foundation)

Labour's "employment rights legislation is also likely to be net negative for GDP,”  he said, adding that Reeves’s comments suggest that the next phase of planning reform "is not ready for to be scored by the OBR in this budget as it was still going through the parliamentary processes.” (See MNI INTERVIEW: Employment Law Hit To UK Productivity - Haskel).

TAX REFORM UNLIKELY

While the UK tax system has accumulated a number of economically damaging features over the years, including in areas such as property, King does not believe that substantive tax reform, rather than just adjusting tax rates, is likely in this budget.

“Based purely on what's filling column inches at the moment, it doesn't seem like rolling the pitch for there being major tax reform programmes launched in the budget,” King said, noting also that the crises of recent years had squeezed the Treasury's 'bandwidth' to undertake large scale reforms.

“It's … getting to the point where it's slightly difficult in the political cycle to think about something for another year and then spend a year or so implementing it, as you’d be right up against the next election,” he added.

MARKET EXPECTATIONS

King noted that Reeves has repeatedly signalled she intends to build a larger headroom than the GBP10 billion buffer with which she met her fiscal rules in March. 

“Having walked the markets to this place, and received some of the lower yields that come with it, it would be very risky not to deliver on that,” he said, adding that there is a case that the headroom figure “will actually have to be part of the Budget speech, rather than revealed afterwards.” (See MNI BRIEF: UK Needs GBP50 Billion Fiscal Consolidation - NIESR)