Originally posted on Business Post 7 March 2021.
When Nigel Farage and Boris Johnson were campaigning for the Brexit vote, did they have it in their script that the first post-Brexit British budget would raise business taxes?
Business tax hikes don’t seem to gel with their vision of a promised land, free from EU shackles. To be fair, neither they nor their political opponents foresaw the impact of a pandemic coinciding with Brexit. Nor for that matter could anyone have envisaged how effective Johnson would turn out to be at tackling a vaccine rollout in his country.
The latter success story was among the few positives for Rishi Sunak, the British Chancellor of the Exchequer, as he presented his budget last Wednesday. The British economic experience has been considerably worse than that encountered by us on this side of the Irish Sea.
Last year, the British economy shrank by 9.9 per cent, according to the UK’s Office of Budget Responsibility, a body comparable to our Fiscal Advisory Council. By contrast, the Irish economy did not shrink in 2020 but seems instead to have recorded a modest increase in growth.
A contraction of the economy in the order of 10 per cent inevitably disrupts the national tax take. By and large there is a direct relationship between economic performance and the performance of tax receipts. There is an estimated fall-off in tax receipts of around 5 per cent in the UK when pre-pandemic receipts are compared to current receipts – the UK’s financial year runs to March 31, not December 31. Yet this link between economic performance and tax performance does not account for all of Sunak’s problems when it comes to funding bigger health and social welfare programmes.
The UK system is far less progressive than the Irish system on taxing individuals. Higher income Irish taxpayers pay a greater proportion of the total income tax collected than their British counterparts. This means that when low-paying jobs disappear, as has unfortunately been the case as a consequence of the pandemic, a significant proportion of the income tax take in the UK is at risk.
The need to broaden the tax base by getting more people and more companies to pay, instead of asking those who already pay to pay more, became a mantra for many politicians in recent years. It now seems that when it comes to having resilient tax receipts to deal with pandemics, a narrow tax base is better. Currently in the UK, income tax figures are holding up largely because of the effect of the coronavirus Job Retention Scheme but these receipts are projected to fall off when the job retention programmes end.
Apparently in response, the British chancellor signalled that income tax bands and allowances for individuals would be frozen. This approach increases tax yield over time because of a phenomenon known as fiscal drag.
As wages increase, some income exceeds the exemption thresholds and becomes taxable while even more income falls into higher taxpaying brackets. Freezing allowances and reliefs in this manner has been a tactic here for years. The personal tax credit for an individual was reduced in 2011 from €1,830 to €1,650, and hasn’t budged since.
Pandemic supports have created an expectation that social welfare benefits will be more broadly available than in the past and therefore more costly to deliver. Sunak has recognised this by heralding very significant increases to British corporation tax rates, ultimately to 25 per cent or twice the Irish rate.
Individual British businesses can only mitigate this additional tax bill by making significant capital investments. Tax increases only work from an exchequer standpoint if there are profits being made by companies to tax, but the UK’s Office of Budget Responsibility is practically cheerful about the Brexit impact on trade.
The fiscal problems facing both British and Irish governments as we exit the pandemic are largely the same; it’s just that the British have had to confront them sooner because of their budget date. Yet Sunak’s actions are redolent of an Austerity 2.0 approach. Corporation tax increases are always easier for an electorate to accept. Freezing income tax reliefs looks innocuous. The less obvious a tax increase, the less politically damaging it is. This week there was a 2 per cent hike here to our standard rate of value added tax. Did you notice?
Unfortunately, Wednesday’s British budget signals a direction of travel on tax increases which Irish governments may have to take in the coming years. As Paschal Donohoe, the Minister for Finance, pointed out last week, it is unrealistic for us to expect foreign lenders to indefinitely fund our social spending aspirations. The correct approach to the current crisis is to borrow and spend, but that has its limits.
Though Irish ministers will be working off a much better economic base than their British counterparts when it comes to the next Irish budget, they would do well to examine what Sunak did last week. The policy decisions will be different and in particular no finance minister here should contemplate for a moment a corporation tax rate increase. But by the time the Irish budget decisions are made in October there will be plenty of insight on how the tax hikes in Britain played out politically and economically.
No more than Johnson or Farage in 2016, few politicians are ever keen to campaign on a platform of tax increases. In a week when British political decisions on the Northern Ireland protocol did us no favours, their budgetary decisions may serve us later in the year as examples of what not to do.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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