ICAEW chart of the week: German federal budget 2022

As Germany heads to the polls this weekend to elect a new federal parliament, the topic of the public finances has moved to centre stage. Our chart this week looks at the federal budget for 2022 and the current plan to sharply reduce the deficit from 2023 onwards.

German federal budget 2022

2021: revenue €307bn + borrowing €240bn = expenditure €488bn + investment €59bn

2022: revenue €343bn + borrowing €100bn = expenditure €391bn + investment €52bn

2023: revenue €398bn + borrowing €5bn = expenditure €352bn + investment €51bn

2024: revenue €396bn + borrowing €12bn = expenditure €357bn + investment €51bn

2025: revenue €396bn + borrowing €12bn = expenditure €357bn + investment €51bn

Source: Bundesministerium der Finanzen: 'Draft 2022 federal budget and fiscal plan to 2025'

The coronavirus pandemic has been accompanied by relaxations in both European and German constitutional limitations on the size of the federal deficit for 2020, 2021 and 2022, with Chancellor Angela Merkel of the Union parties (the Christian Democratic Union (CDU) together with Bavaria’s Christian Social Union (CSU)) and Finance Minister and chancellor-candidate Olaf Scholtz of the Social Democratic Party (SPD) setting out a plan earlier this year to reduce federal borrowing significantly by 2023.

As the #icaewchartoftheweek illustrates, the plan is to continue to run a sizeable deficit of €100bn in 2022 with tax and other revenue of €343bn being offset by €391bn in expenditure and €52bn in investment spending. This is a smaller deficit than the €240bn forecast for the current year (revenue €307bn – expenditure €488bn – investment €59bn) and the €131bn recorded in 2020 (not shown in the chart: revenue €311bn – expenditure €392bn – investment €50bn), both of which contained significant amounts of emergency spending in response to the pandemic. 

The hope is that revenues will recover in 2023 to €398bn at the same time as expenditures and investment return to pre-pandemic levels of €352bn and €51bn respectively to leave only a €5bn shortfall to be covered by borrowing. The forecast deficit for both 2024 and 2025 is €12bn, comprising revenue of €396bn in both years, less expenditure of just under €396bn in 2024 and just over €396bn in 2025 and investment in both years of €51bn. It is important to note that this is the budget for the federal government only and excludes the share of joint taxes going to Germany’s states (Länder) as well as expenditures funded from state and local taxation.

The challenge for the three principal candidates for the chancellorship: Olaf Scholtz of the SPD, Armin Laschet of the Union parties and Annalena Baerbock of the Green party, is in how to make promises to spend more on their respective priorities while maintaining the low levels of borrowing required by the constitution outside of fiscal emergencies. 

Major flooding earlier this year has put climate change at the top of the electoral agenda, with the need to increase investment to achieve net zero a key theme of party platforms. Together with promises to invest more in infrastructure and the need to cover the cost of more people living longer, higher defence spending and other financial commitments, there are significant questions about whether the path to near-budget balance can be achieved. Given the economic uncertainty, the prospect of returning to the pre-pandemic policy of paying down government debt seems unlikely, although that policy helped reduce general government debt from a peak of 82% of GDP in 2010 following the financial crisis. Despite the additional borrowing because of the pandemic, general government debt is still below that level at somewhere in the region of 75% of GDP – putting Germany in a much better fiscal position than many of its European neighbours, including the UK.

One candidate to be the next finance minister is Christian Lindner of the liberal Free Democratic Party (FDP), a possible partner in either a ‘traffic-light coalition’ of SPD (red), Greens (green) and FDP (yellow) or a ‘Jamaica coalition’ of the Union parties (black), Greens (green) and FDP (yellow) although this will of course depend on how the parties perform in the election on Sunday 26 September. Alice Weidel and Tino Chrupalla, joint leaders of the hard-right Alternative for Germany (AfD), and Janine Wissler & Dietmar Bartch, joint leaders of the Left Party (Die Linke), are considered unlikely to find their way into the federal cabinet in most scenarios.

Unlike in the UK, where a new prime minister customarily takes up residence in 10 Downing Street the next day, there is unlikely to be an instant change in national leadership. Chancellor Angela Merkel and most of her existing Union/SPD ‘Grand coalition’ cabinet are likely to stay in caretaker positions for several weeks or potentially months as fresh coalition negotiations between the parties elected to the Bundestag are concluded.

This chart was originally published by ICAEW.

Bad debts hit public finances as last year’s deficit is revised up to £325bn

Manifesto-breaching tax rise does not mean the end of the financial challenges facing the Chancellor in the run up to the Autumn Budget and three-year Spending Review on 27 October.

The public sector finances for August 2021 released on Tuesday 21 September reported a monthly deficit of £20.5bn, better than the £26.0bn reported for August 2020 but still much higher than the deficit of £5.2bn reported for August 2019. This brings the cumulative deficit for the first five months of the financial year to £93.8bn compared with £182.7bn last year and £27.2bn two years ago.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2021 up by £27.1bn from £298.0bn to £325.1bn, principally as a consequence of recognising an estimated £21bn in bad debts on coronavirus loans to businesses.

Public sector net debt increased from £2,201.5bn at the end of July to £2,202.9bn or 97.6% of GDP at the end of August. This is £67.1bn higher than at the start of the financial year and a £416.8bn increase over March 2020.

As in previous months this financial year, the deficit came in below the official forecast for 2021-22 prepared by the Office for Budget Responsibility, which is likely to reduce its projected deficit of £234bn for the full year when it updates its forecasts for the Autumn Budget and Spending Review on 27 October. 

Cumulative receipts in the first five months of the 2021-22 financial year amounted to £347.1bn, £48.4bn or 16% higher than a year previously, but only £12.4bn or 4% above the level seen a year before in 2019-20. At the same time cumulative expenditure excluding interest of £391.8bn was £39.9bn or 9% lower than the first five months of 2020-21, but £69.2bn or 21% higher than the same period two years ago.

Interest amounted to £30.8bn in the five months to August 2021, £10.7bn or 53% higher than the same period in 2020-21. This was principally because of the effect of higher inflation on index linked gilts. Despite the much higher levels of debt than two years ago, interest costs were only £3.8bn or 14% higher than the equivalent five months ended 31 August 2019.

Cumulative net public sector investment in the five months to August 2021 was £18.3bn, including £0.6bn in estimated bad debts on coronavirus lending in the current financial year. This was £11.3bn less than last year’s £29.6bn for the five months to August 2020, which included £15.6bn for coronavirus lending that is not expected to be recovered. Investment was £6.0bn or 49% more than two years ago, principally reflecting a higher level of capital expenditure.

Debt increased by £67.1bn since the start of the financial year, £26.7bn less than the deficit as tax receipts deferred last year were collected and coronavirus loans were repaid.

Alison Ring, ICAEW Public Sector Director, said: “Today’s numbers from the ONS illustrate the significant financial challenges facing the Chancellor as he puts together next month’s Budget and three-year Spending Review while public sector net debt hovers at almost 100% of GDP. The additional billion pounds a month the Chancellor expects to generate from the new tax and social care levy from next April needs to be seen in the context of the £20.5bn shortfall in the public finances recorded in the past month alone.

“Meanwhile, the belated recognition of £21bn in bad debts from coronavirus lending is a reminder of the scale of support the government has provided to keep the economy going during the pandemic. The risk for the next few months is that higher-than-expected inflation, shortages on shelves and disruptions in gas and energy markets may push the post-pandemic economic recovery off course and require further interventions, making the challenge of repairing the public finances even greater than it already is.”

Image of table showing public sector finances for the five months to 31 August 2021 and variances against prior year and two years ago.

Click on link at end of post to go to the ICAEW website for a readable version of this table.

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £26.0bn to £25.8bn, for May 2021 from £20.2bn to £19.8bn, for June 2021 from £21.4bn to £20.7bn and for July 2021 from £10.4bn to £7.0bn. The deficit for the twelve months ended 31 March 2021 was revised up from £298.0bn to £325.1bn.

Image of table showing summary public sector finances for each of the five months to 31 August 2021.

Click on link at end of post to go to the ICAEW website for a readable version of this table.

This article was originally published by ICAEW.

Public debt hits £2.2tn as Budget delay rumours swirl

A June deficit of £22.8bn resulted in public sector net debt reaching £2,218.2bn or 99.7% of GDP at the end of the first quarter of the 2021-22 fiscal year, fuelling speculation that the Chancellor may delay the Autumn Budget and departmental spending reviews.

The latest public sector finances released on Wednesday 21 July reported a deficit of £22.8bn for June 2021, as COVID-related spending continued to weigh on the public finances, albeit at a reduced rate. This is an improvement from the £28.2bn reported for the same month last year during the first lockdown but was still significantly higher than the £7.0bn reported for June 2019.

Public sector net debt increased to £2,218.2bn or 99.7% of GDP, an increase of £80.8bn since March 2021 and £420.5bn higher than March 2020 just fifteen months ago.

Cumulative receipts in the first three months of the financial year of £201.6bn were £29.5bn or 17% higher than a year previously, but this was only £6.4bn or 3% above the level seen a year before that in the first quarter of 2019-20. At the same time cumulative expenditure of £243.4bn was £26.0bn or 10% lower than the first three months of 2020-21, but £51.6bn or 27% higher than the same period two years ago.

The effect of higher inflation on index-linked gilts drove a jump in interest costs, which at £18.1bn in the quarter to June 2021 were £6.0bn or 50% higher than Q1 in 2020-21, albeit this was still £0.4bn or 2% lower than the quarter ended 30 June 2019 despite much higher levels of debt. 

Net public sector investment was slightly lower than last year with £9.6bn invested in the three months to June, down £0.3bn or 3% from a year before but up £1.7bn or 22% from two years ago. This combined to produce a cumulative deficit for the first three months of the 2021-22 financial year of £69.5bn, £49.8bn or 42% below that of the same period a year previously, but up £46.5bn or 202% from the first quarter of the 2019-20 financial year.

Debt movements reflected £11.3bn of additional borrowing over and above the deficit for the quarter, principally to fund coronavirus loans to businesses. Public sector net debt of £2,218.2bn is £245.5bn or 12% higher than a year earlier and £438.2bn or 25% higher than in June 2019.

The Office for National Statistics revised the reported deficit for the year ended 31 March 2020 down by £1.5bn from £299.2bn to £297.7bn, still a peacetime record. The final total is still expected to exceed £300bn as the ONS has yet to include in the order of £27bn of bad debts on COVID-related lending in this number. Estimates will be refined further over the next few months.

Alison Ring, ICAEW Public Sector Director, said: “Public sector net debt has risen by £420bn since the first lockdown in March 2020, making the public finances more vulnerable to changes in interest rates and reducing the fiscal headroom available to the Chancellor as he seeks to navigate the economy out of the pandemic.

“Rumours that Rishi Sunak is considering cutting investment plans and delaying the Budget and departmental Spending Reviews are concerning. It is important that the baby of borrowing sensibly to fund much-needed investment in infrastructure is not thrown out with the bathwater of post-pandemic spending restraint.

“Central and local government desperately need budget certainty so they can plan, even if there are some adjustments next year when we all hope the pandemic will have run its course. The last full Spending Review was in 2015; it’s important that we end the cycle of deferral and delay and restore financial discipline to the government’s budgeting.”

Public sector finances 2021-22: three months to 30 June 2021

3 months to
June 2021
Variance vs
prior year
Variance vs
two years ago
£bn£bn%£bn%
Receipts201.629.5+17%6.4+3%
Expenditure(243.4)26.0-10%(51.6)+27%
Interest(18.1)(6.0)+50%0.4-2%
Net investment(9.6)0.3-3%(1.7)+22%
Deficit(69.5)49.8-42%(46.5)+202%
Other borrowing(11.3)44.4-80%(19.7)-235%
Change in net debt(80.8)94.2-54%(66.2)+453%
Public sector net debt2,218.2245.5+12%438.2+25%
Public sector net debt / GDP99.7%6.3%+7%19.4%+24%
Public sector finances 2021-22: three months to 30 June 2021

Public sector finances 2021-22: fiscal deficit by month


Receipts
Expend-
iture

Interest
Net
investment

Deficit
£bn£bn£bn£bn£bn
April 202166.2(82.3)(4.8)(5.2)(26.1)
May 202166.3(80.8)(4.5)(1.6)(20.6)
June 202169.1(80.3)(8.8)(2.8)(22.7)
Cumulative to June 2021201.6(243.4)(18.1)(9.6)(69.5)
Public sector finances 2021-22: fiscal deficit by month

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled.

The ONS made a number of revisions to prior month and prior year fiscal numbers to reflect revisions to estimates. These had the effect of reducing the reported fiscal deficit for April 2021 from £29.1bn to £26.1bn, for May 2021 from £24.3bn to £20.6bn and for the twelve months ended 31 March 2021 from £299.2bn to £297.7bn.

For further information, read the public sector finances release for June 2021.

This article was originally published by ICAEW.

ICAEW chart of the week: personal taxation by legal form

ICAEW’s chart this week compares the differences in the tax payable depending on legal form – an area ripe for reform in theory, but much more difficult in practice.

Chart showing tax payable on £80,000 of business earnings:

Employee - income tax: 20.0%, employee NI 6.6%, employer NI 10.7% - take home pay 62.7%.

Self-employed - income tax: 24.3%, employee NI 5.5% - take home pay 70.2%.

Company owner - income tax 9.9%, corporation tax 16.9% - take home pay 73.2%.

Comments by the Chancellor last year suggested he might tackle one of the thorniest challenges in the UK tax system – the differences in tax paid by individuals depending on the legal form through which they conduct their business activities. However, as the controversy over IR35 has demonstrated, a significant amount of political capital is likely to be needed if changes are to be made.

The #icaewchartoftheweek provides an illustrative example of just how significant the differences can be, with £80,000 in business earnings attracting an effective tax rate of 37.3% if paid to an employee on a salary of £71,460, 29.8% if paid to an individual who is self-employed or in a partnership, or 26.8% if earned through a company and distributed as dividends. 

(It is important to note that this is a theoretical illustrative example for a single person with no other earnings and not paying any pension contributions, with the company owner in the example paying a salary equivalent to the secondary threshold for national insurance before paying the rest as dividends. Actual amounts of tax paid will of course depend on both business and individual circumstances, which can vary significantly.)

The last decade or so has seen a significant increase in the numbers of people becoming self-employed or conducting business through their own companies, and the tax authorities have been concerned about the loss in tax that has followed. One way they have sought to tackle this is by removing the tax benefits of being self-employed or operating through a company from some people, which is the approach adopted by IR35. Coming into force this month, IR35 in effect creates a new legal status of ‘deemed employee’ for tax purposes, reclassifying individuals back into the scope of employment taxes. This has proved highly controversial, accompanied as it is by extensive compliance requirements and general unhappiness by those determined to be subject to it.

Another potential approach would be to change the taxes and tax rates applying to three different forms – either by reducing the taxes on employees or by increasing them on the self-employed or those operating through companies. The former seems unlikely given the state of the public finances, but the challenge in increasing rates can be extremely politically difficult, as former Chancellor Philip Hammond found a few years ago when he proposed a relatively modest increase in the amount of national insurance to be paid by the self-employed.

Whether current Chancellor of the Exchequer Rishi Sunak will take forward a suggestion he made last year when he announced the self-employed income support scheme last year that taxes on the self-employed might rise is yet to be seen. However, what is likely is that this and future Chancellors will continue to look at this particular aspect of the tax system and wonder how they might collect a little more from the ranks of the self-employed and company owners. 

This chart was originally published by ICAEW.

ICAEW chart of the week: Tax Day

26 March 2021: ICAEW’s chart this week is in honour of Tax Day, the newest fiscal event in the government calendar where reforms of the tax system under consideration are opened up to consultation.

Chart showing components of tax receipts of £732bn in 2021-22 and changes to the £928bn projected in 2025-26.

Numbers for chart elements included in the text below.

The #icaewchartoftheweek starts with the Spring Budget forecast tax receipts of £732bn for the coming financial year from 1 April 2021 and how these are expected to increase to £928bn in 2025-26 through a combination of economic growth, inflation and higher receipts principally from corporation tax, income tax, VAT and business rates. 

The chart illustrates how the ‘big three’: income tax (£198bn in 2021-22), VAT (£151bn) and national insurance (£147bn) together comprise 67.8% of the total tax take, with corporation tax (£40bn), council tax (£40bn), fuel duties (£26bn), business rates (£24bn), alcohol & tobacco duties (£22bn), stamp duty (£12bn) generating a further 22.4%. The next 5 taxes – environmental levies (£10bn), capital gains tax (£9bn), insurance premium tax (£7bn), vehicle excise duties (£7bn) and inheritance tax (£6bn) – generate 5.3%, while all other taxes (£33bn) comprise the balance of 4.5%.

With the Chancellor constrained by a commitment not to raise the main rates of income tax, VAT and national insurance, the principal focus of both the Spring Budget and Tax Day has been on improving the tax take from existing taxes, for example by looking at tax reliefs and tackling tax avoidance, and on raising more money from smaller taxes.

This is reflected in the Office for Budget Responsibility projections for tax receipts that accompanied the Spring Budget, which indicate that receipts from most taxes are expected to rise broadly in line with economic growth (generating £80bn in higher tax receipts) and inflation (£46bn) between 2021-22 and 2056-26. This reflects anticipated economic recovery from the pandemic as well as a boost from stimulus measures announced by the Chancellor in addition to existing plans to increase public investment.

The biggest incremental change is an expected increase in corporation tax receipts of £38bn over and above economic growth and inflation. Some of this rise is recovery to a more normal level, as businesses will be able to reduce their tax bills in the coming year by offsetting losses incurred during the pandemic and using the temporary ‘super deduction’ of 130% of qualifying capital expenditure, but the principal driver is an increase in the corporation tax rate on larger businesses from 19% to 25% in 2023.

The next highest increases are from income tax (+£16bn) and VAT (+£9bn) where a combination of fiscal drag from freezing tax allowances (income tax) and registration thresholds (VAT) will bring more transactions into the scope of both taxes and hence generate more revenue. Both taxes are also the focus of efforts to make taxes easier to pay and to tackle tax avoidance as addressed in several of the Tax Day consultations. 

The other significant increase is in business rates (+£7bn), although this mostly reflects pandemic related reliefs in the coming financial year that are not expected to continue into subsequent financial years. In practice, there are some questions as to whether this increase will be deliverable, with the Tax Day consultation on business rates suggesting that levels are too high and a reduction could help bricks and mortar businesses survive against online competition and so ‘save the high street’. The dilemma for the Chancellor is that if he were to cut business rates as some hope, then what tax lever he would need to pull to make up for that lost revenue?

Much of the focus of this first Tax Day has been on the efficiency and effectiveness of the tax system and how it can be made to work better. Perhaps future Tax Days will tackle some of the bigger questions surrounding the role of taxation in the long-term sustainability and resilience of the public finances – and whether some bigger tax levers might need to be pulled at some point in the future?

This chart was originally published by ICAEW.

Public debt exceeds 100% of GDP for first time since 1963

22 June 2020: The fiscal deficit of £103.7bn for April and May 2020 is over six times as large as the £16.7bn reported for the same period last year.

The latest public sector finances for May 2020 published by the Office for National Statistics (ONS) on Friday 19 June 2020 reported a revised deficit of £48.5bn for April and a deficit of £55.2bn for May 2020.

Public sector net debt increased to £1,950.1bn or 100.9% of GDP, an increase of £173.2bn (up 20.5 percentage points) compared with April 2019. This is the first time the headline debt number has exceeded 100% of GDP since 1963, although the ONS cautions that the numbers for the deficit and for GDP are both subject to potentially significant revisions.

Table showing receipts, expenditure, net investment, deficit and public sector net debt.  Details available on ICAEW article - click link at end of this post.

These results reflect the substantial fiscal interventions by the UK Government to support businesses and individuals affected by the coronavirus pandemic, together with a collapse in tax revenues as a consequence of the lockdown.

The deficit of £103.7bn for the two months to May is more than the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget in March.

Cash funding (aka the ‘public sector net cash requirement’) for the two months was £143.5bn, compared with £1.8bn for the same period in 2019.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be revised as estimates are refined and gaps in the underlying data are filled.

Alison Ring, director of public sector for ICAEW, commented:

“Significant borrowing over recent months means that this is the first time in more than 50 years that debt has been larger than GDP. And though the furlough scheme to date has cost less than originally estimated, cash funding in April and May was more than in the previous three financial years combined.

These are major milestones for the public finances and demonstrate the unparalleled impact of coronavirus, even if this is not surprising given the huge amounts of financial support the government is providing to keep the economy going through lockdown.”

This article was originally published by ICAEW.

April public finances awash with red ink

27 May 2020: fiscal deficit of £62.1bn in April exceeds budget of £55bn for the whole of 2020-21.

The latest public sector finances for April 2020 published by the Office for National Statistics (ONS) reported a deficit of £62.1bn in April and a revision of £14.0bn to the deficit in the financial year to March 2020; a total of £76.1bn in costs and revenue losses reported since the previous monthly release.

Public sector net debt increased to £1,887.6bn or 97.7% of GDP, an increase of £118.4bn or 17.4 percentage points compared with April 2019.

These results reflect the substantial fiscal interventions by the UK Government to support businesses and individuals affected by the coronavirus pandemic, together with a collapse in tax revenues since the lockdown. The deficit of £62.1bn for the month of April is more than the budgeted deficit of £55bn for the whole of the 2020-21 financial year set in the Spring Budget only a couple of months ago.

Table 1 summarises the results for April 2020, while Table 2 sets out the revised results for the financial year to 31 March 2020.

Some caution is needed with respect to the numbers published by the ONS, which are expected to be revised as estimates are refined and gaps in the underlying data are filled.

Alison Ring, director of public sector for ICAEW, commented:

“The volume of red ink in April’s public finances is astonishing.

The scale of the damage from the coronavirus pandemic is only just starting to become apparent, particularly when you consider that the deficit in April alone is more than previous forecasts for the whole of 2020-21.

A full-year deficit of £300bn as suggested by the Office for Budget Responsibility looks increasingly plausible, with the only silver lining the ultra-low interest rates payable on the borrowing needed to finance it.”

This article was originally published by ICAEW.

ICAEW chart of the week: Spring Budget 2020

13 March 2020: Forecast deficits increase with new spending announced in the Spring Budget, even before the impact of the coronavirus.

Forecast deficit before and after the Budget. 2020-21: £40bn to £55bn, 2021-22: £38bn to £67bn, 2022-23: £35bn to £61bn, 2023-24: £33bn to £60bn, 2024-25: £58bn.

13 March 2020.   Chart research by Martin Wheatcroft FCA, design by Sunday.   ©ICAEW 2020
Source: HM Treasury, ‘Spring Budget 2020’.   2020-21 excludes £12bn additional funding in response to the coronavirus.

The sheer scale of the Spring Budget 2020 spending announcements are difficult to comprehend, but the #icaewchartoftheweek makes an attempt by illustrating their effect on the fiscal deficit compared with the previous forecast.

The budgeted deficit in the coming financial year is expected to increase by £15bn to £55bn, even before taking account of the emergency £12bn to respond to the coronavirus that was decided after the forecasts were finalised. The deficit is also expected to be much greater than the previous forecast in each of the subsequent years, albeit there was no previous official forecast for 2024-25.

The increase in the deficit in 2020-21 of £15bn reflects higher spending of £19bn less £1bn in higher taxes and £3bn in other forecast revisions. The spending increases in the subsequent four years are even greater, with an extra £46bn on average a year before taking account of £7bn a year in higher taxes, £8bn a year from the indirect boost to the economy that the incremental spending and investment should provide, as well as an average of £3bn a year in other forecast revisions.

The big uncertainty is how much the UK and global economies will be affected by the coronavirus pandemic in addition to the existing economic headwinds and changes in the trading relationships with other countries in the EU and elsewhere in 2021. These risks could potentially reduce tax revenues significantly, leading to even greater fiscal deficits than those presented by the Chancellor on Wednesday.

For more on Budget 2020 visit ICAEW’s dedicated Budget Hub. For the latest news and advice for accountants on the Covid-19 outbreak visit ICAEW’s Coronavirus hub.

ICAEW chart of the week: Raising taxes is hard to do

6 March 2020: How can the Chancellor raise taxes in the forthcoming Spring Budget?

Tax receipts 2019-20 £751bn. Top six taxes £615bn (82%): income tax £196bn. VAT £155bn, NI £143bn, corporation tax £54bn, council tax £36bn, business rates £31bn.

Traditionally, the first Budget after an election raises taxes and this would be a logical step given plans to increase public spending and investment in infrastructure. But which taxes could the Chancellor increase?

As the #icaewchartoftheweek illustrates, the top six taxes generate over 80% of tax receipts. But the Conservative manifesto rules out increases in the headline rates of income tax, national insurance and VAT, while increasing the corporation tax rate would be difficult given the planned cut from 19% to 17% has already been suspended. Most local authorities are already planning to increase council taxes as much as they can while increasing business rates would be really difficult.

We await the Budget to see what the Chancellor decides to do. Some money could be generated from increasing or introducing smaller taxes but for larger sums, the main place to look would be from reforming tax reliefs and exemptions, such as the rumoured abolition of Entrepreneurs’ Relief. However, it would be a brave Chancellor that decided to go after larger sums, for example by extending the scope of VAT.

Of course, the Chancellor might decide to cut taxes instead, hoping to boost a sluggish economy and so generate greater sums through higher levels of growth. Either way, borrowing is likely to increase – fortunately at extremely low interest rates.

This chart was originally published by ICAEW.

ICAEW Fiscal Insight: General Election 2019

On 12 December 2019, voters have the opportunity to focus on the big challenges of sustainability, technology and the public finances as they elect a government for the next four and a half years. 

ICAEW have published a Fiscal Insight on the General Election 2019 manifesto proposals of the Conservatives, the Labour Party, the Liberal Democrats and the Green Party.

All the political parties are promising to increase taxes, public spending and investment. The Conservatives are promising the least, but they have deferred significant decisions. Other parties propose spending a lot more, with Labour planning to nationalise utilities. There are new fiscal rules, but questions about whether they would be adhered to.

This is in the context of public finances that are on a financially unsustainable path and – disappointingly – none of the parties set out a long-term fiscal strategy. There are significant risks around the achievability of all the party manifesto plans, with the projected deficit in 2023–24 of £62bn (Conservatives), £118bn (Labour), £76bn (Liberal Democrats) or £133bn (Greens).

Read the Fiscal Insight on the ICAEW website.