As lockdown lifts I am sure many of us are worrying about two things: a second wave; and the bill.
Rishi Sunak has so far proved to be the most generous chancellor in a long time. His March budget was already expected to take government spending this year to £55bn more than the government received. Then came covid-19; and now that figure is around £337bn, bringing overall debt to in excess of £2trn.
Just pause a moment there. When numbers get this big it is easy to skim over them. By Christmas the national debt will be more than our GDP, which has not happened since the 1950s when we were paying for World War II.
Fortunately (for the government, though not savers) interest rates are low – at one point in May the government was issuing bonds paying negative rates. As a consequence we are paying less interest now than we were on a much smaller national debt in January.
That will help. But if this debt is to come down (and it must before interest rates rise, as they will eventually), the chancellor needs to find the money elsewhere. Inflation has been useful in the past but we are seeing very little of that at the moment.
It is hard not to imagine that we are facing higher taxes. Actually, it could be argued that Sunak has a once in a lifetime opportunity to introduce radical tax changes. Remember the fight his predecessor Philip Hammond had on his hands when he tried to make the self-employed pay the same national insurance as those who are employed? The speed of his U-turn would have impressed any white van driver.
You cannot imagine Sunak facing as much resistance now for the same thing. We all know the bill for keeping the economy afloat during lockdown has to be paid; we understand this is a crisis and we will not protest too much at changes.
Our chairman, Jamie Hambro, recently tried to tot up what some basic changes might raise, drawing on the government’s own calculations and external research.
He estimated that levelling national insurance rates for everyone would bring in £5bn a year. Income tax generates nearly a third of government income; increasing the basic rate by 1% would raise another £4.7bn; raising the higher rate by 1p would generate £980m. These would seem hard taxes to pass – unless, perhaps, they were tied to protecting the welfare state and funding reform of later life care.
Abandoning the pensions triple-lock commitment would bring in £500m in the near term, perhaps. This guarantees a minimum increase in the state pension each year of either 2.5%, the rate of inflation or average earnings growth, whichever is the largest. Pensions have risen twice as fast as the average worker’s earnings in the past decade because of it. That is arguably unsustainable. Scrapping it has been estimated to save the Treasury around £16bn over 40 years.
Corporation tax had been due to fall to 17% this year but is staying at 19%. That should save £4.6bn a year. But we do not imagine the chancellor is keen on taking that higher on the eve of Brexit when Britain needs to be its most competitive and alluring to overseas investors.
Aligning capital gains tax with income tax and scrapping higher-rate pensions tax relief could be passed as tax simplifications that only hit the wealthy and would raise a few billion. Wealth taxes are unpopular and complex to enact, but it would be relatively simple to reduce inheritance tax (IHT) thresholds and even increase the rate from 40%. IHT generated over £5bn last year, but a 1% rise in the IHT rate would generate only £360m extra over three years. To raise more would require a serious hike in the rates or a cutting of the threshold.
If there is anything positive in the covid-19 crisis for the chancellor it is the increased use of electronic payments. It is estimated that cash-in-hand payments that are undeclared cost the government over £3bn a year. In total the government estimates that it is losing £35bn a year in taxes that are ducked or unpaid in one way or another. Electronic payments will make it easier to plug the leaks. What does that add up to? Realistically, it is somewhere between £10bn and £15bn a year. That is a lot of money; but the furlough scheme alone is costing £50bn.
What does it mean for savers and those carefully shepherding their own finances? Tax is a good thing. Our NHS and welfare state would not survive without it. It pays for roads, schools and our defence. We will all have to pay our share. But if you are worried about the impact it will have on your finances, I would say make the most of the generous tax breaks you have already. Many of them may not last much longer.
See a financial planner and review your finances quickly so you – and your finances – are in the best position possible for the months and years that lie ahead. But keep some proportion, too. It is easy to get so focused on saving tax that you end up worse off – as countless footballers who have signed up to well publicised tax avoidance schemes will testify.
More by Charles: Managing retirement income in a crisis when options are restricted