This week’s chart of the week from ICAEW looks at the revenue side of the public finance equation.
As the second Budget of the year approaches, the Chancellor faces a dilemma. With productivity and economic growth sluggish, will he try to find more money for public services by increasing taxes or attempt to stimulate the economy by lowering them?
Chancellors often use the first Budget following an election to increase taxes. The problem on this occasion is that it will be difficult politically to increase one of the “Big 3” taxes (income tax, VAT and NI) that generate 60% of the government’s income.
However, it is also difficult to see how the Chancellor could raise significant sums from any of the next five biggest taxes that together generate a further 21% of total income. All of business rates, council tax and fuel duties are constrained by political pressures. Further hikes in stamp duty are also unlikely, and the Government has committed to reducing corporation tax, from 19% this year to 17% in 2020.
With few opportunities to raise anything significant from other taxes, this leaves borrowing as the alternative. The good news is that the government is on course to come in several billion pounds below its borrowing target for this financial year.