Two years ago, the director of the Office for Budget Responsibility wrote the following:
“Broadly speaking, the fiscal position is unsustainable if the public sector is on course to absorb an ever-growing share of national income… The baseline projection in each of our reports — since the first was published in 2011 — has pointed to an unsustainable fiscal position over the long term.”
If that was the case in 2018, next year’s Fiscal Sustainability Report should make for stimulating reading.
In March (in other words, before the coronavirus crisis had properly hit the UK), this year’s budget deficit was expected to be £55bn (three per cent of GDP). It is now likely to exceed £350bn (roughly 18 per cent of GDP).
Consequently, government debt could reach £2.2 trillion this year — a peacetime record — with perhaps an additional £250 billion next year. Add to that dent in the public finances roughly £125bn of tax deferrals and loan guarantees offered to support individuals and businesses during the lockdown period, much of which will never be repaid.
And then there is the stockpile of unfunded liabilities that have nothing to do with Covid-19, including the state pension (roughly £4.5 trillion in 2018), public sector pensions (£1.9 trillion), unfunded provisions for nuclear decommissioning costs (£263bn), and clinical negligence claims against the NHS (£78bn).
How do we even begin to pay for this? More debt will certainly feature, but it leaves the Treasury (that is, taxpayers) increasingly exposed to rising interest rates. The short-term risk of inflation is low, but thereafter, no one knows. And as the debt-to-GDP ratio climbs, we increasingly risk a collapse in confidence in the gilts market, jeopardising affordable future issuance.
An old favourite of successive chancellors is financial repression, such as raising income tax rate thresholds by less than the rate of wage growth, thereby increasing the average rate of tax paid (a form of fiscal subterfuge). But the benefit to the Treasury will be seen as mere fiddling relative to the scale of its additional income requirement.
So, how are we going to avoid bequeathing a debt-laden future to our children? Let us not forget that they already face high university debts, rapidly rising unemployment, sclerotic economic growth, unaffordable housing, thin pension provision, and the prospect of having to support an increasingly ageing population. We need a plan to put their future on more sustainable footing.
Options are limited. The government’s 2019 manifesto unwisely commits it to not increasing income tax, national insurance and VAT. Raising corporation tax would put additional pressure on businesses that are already struggling to survive and threaten jobs — and would, in any event, only produce an extra few extra billion, nowhere near enough.
The government faces a tough choice: it could break promises, savage tax reliefs (it will do this, but apart from pensions tax relief, there is a limit to how much this could raise), or tax household wealth.
Household wealth was last reported at £14.6 trillion, comprising pension pots (42 per cent), equity in homes (35 per cent), financial wealth (15 per cent) and physical wealth such as artworks or vehicles (nine per cent).
The £5.1 trillion in home equity is largely unearned as it is the result of rising property prices, and is heavily concentrated among the older generations — over-50s hold 75 per cent of all Britain’s housing wealth.
So how’s this for a proposal: we should scrap principal private residence relief which means people are not liable for capital gains tax if they are selling their home, and introduce a 10 per cent property capital gains tax on all homes. It would be payable when cash is available (unlike, for example, an annual mansion tax), at the time of sale or settling an estate following the death of the last living owner.
To balance this out, the main home should then be excluded from the inheritance tax assessment. Unlike inheritance tax, a property capital gains tax would be hard to avoid by transferring assets prior to death. We should also scrap all stamp duty on the main home, and introduce a first-time buyers’ incentive. Consequently, sellers who have benefited from rising property prices will pay more tax, rather than struggling buyers.
Over the next 25 years, these proposals would likely produce well over £400bn for the Treasury. Yes, they are politically challenging, but they are progressive (the wealthy have the most valuable houses), they move the tax burden of home purchase from the buyer to the seller, and would help restore some semblance of intergenerational fairness.
The alternative is to leave the young facing a dangerously indebted future — hardly a Conservative success story.
Main image credit: Getty