Coronavirus could bring about public support for long-overdue changesby Joe Marshall / April 20, 2020 / Leave a comment
Coronavirus is first and foremost a devastating health crisis, but the measures needed to halt its spread have made it an economic one too. The government has rightly prioritised saving lives and supporting businesses and households while the economy is kept on ice. Additional funding for public services, the government’s economic rescue package and the loss of tax revenues is likely to add over £200bn to public debt, according to the Office for Budget Responsibility. The crisis may also create desire for a permanently larger state—with higher spending to increase resilience in public services and provide a more generous welfare system. All this will increase pressure on the national finances. But the UK’s tax system is poorly placed to raise the revenue that will be needed. After years of neglect, tax reform will be essential.
Decades of piecemeal changes to the UK tax system have left it complicated, inefficient and beset with perverse incentives that do little to raise revenue or meet the government’s wider economic objectives. Changes in the economy in recent years mean the government is already finding it harder to raise revenue—for example, digital businesses are increasingly prevalent but harder to tax, while self-employment had become increasingly widespread (at least prior to the outbreak of coronavirus) but the self-employed have to date been more lightly taxed than employees.
Even before the coronavirus crisis, the UK system looked inadequate in the face of the mounting health and social care needs of the UK’s aging population. There has been little public appetite in recent months for paring back public services and, if anything, the experience of coronavirus is likely to increase support for more funding for the NHS and social care.
Once the immediate crisis has passed, the government will need to take stock of how the state is funded. Tax reform must form part of the solution to help ensure the tax system raises the revenue needed in the most efficient and least distortionary way possible. But changing the system has proved difficult for governments of all stripes. The political risks are high, lay understanding of tax is poor and some aspects of tax policymaking militate against improvements. Some have not tried. Others have tried but failed, most recently Philip Hammond, who attempted to make a first step towards equalising the tax…