The Corona Virus, a dual-pandemic, is a global threat to the health and wealth of nations. It left an unfriendly impact on the economies of the world due to its sudden outbreak. The first case of the Corona Virus appeared in Wuhan city of China on 31 December 2019. Very rapidly, the virus started affecting other countries too.
The novel-Covid-19 entered the UK in January 2020 when the World Health Organization (WHO) already declared it as a pandemic in the last month of 2019. Very quickly, the virus not only took a toll on the mental and physical health of people, but its influences were viable on economies of the world, and the UK marketplace was no exception.
It was more of a potential and fundamental threat to the national economy. It was not a temporary business contraction. To a vast degree, the novel covid-19 imperilled the worldwide economy. Nobody knows how and when the pandemic will end. However, the macroeconomic shocks in any economy are likely to intensify across the markets.
And, in the current setting, epidemic recovery takes precedence over economic recovery. Therefore, it would not be feasible for the economies to wait for the pandemic to end. The countries need to devise precise strategies and come with better plans to deal with them. The nations need to take bold measures before the pandemic ends.
Without planning strategically, the economic downturn may become inescapable. As far as the UK is concerned, it is about time the UK chancellor and Bank of England started revising their fiscal and monetary policies because of the outbreak.
On 15 March, the major divisions of the economy, the main contributors to public revenue, had to shut down momentarily, and the stay-at-home order was issued formally by the UK government. This decision was, for sure, for the benefit of public health, but its economic consequences were far more than expected.
Its far-reaching economic and devastating consequences disrupted the nations throughout the world. Reports say that the Capital markets witnessed the highest single-week losses on 28 February 2020, after the 2008 financial crisis.
The Global market was disturbed, and amidst all these, the nations had to thought about recovery and survival. According to a survey conducted by SENOL and ZEREN (2020), financial markets in every corner of the world suffered significant drops.
Furthermore, when the UK government enforced a lockdown, demand dropped dramatically, and the global economy slowed down. Coming towards the UK, the novel Covid-19 impacted every sector of the UK economy.
Alone in April and May, there was almost no development in the hospitality, pubs, restaurants, and hotel sectors. According to records, the information and networking field also had no improvement relevant to February. The March Lockdown crashed the industries the most. Besides, the accommodation, food industry, the arts, and culture were among the most affected sectors by the March-July Sanctions.
With that, it also rigorously impacted the wholesale and retail sectors. The output from these sectors fell by 36% below February levels. The bans were relaxed, but even after that, the economy failed to recover entirely. For example, by September, Gross Value Added (GVA) in accommodation and food was 24% lower than in February. However, the GVA in arts, culture, and recreation was 2% lower, despite a keen recovery in wholesale and retail.
According to Statistics of the Office for National Statistics (ONS), the Gross Domestic Product in April was 15% lower. Economic development began to accelerate in May, but production remained 8.2 percent lower in September than in February.
Role of Increased Tax Rates in Coping with Covid-19:
As already discussed, the covid-19 killed millions of people and disturbed the lives of so many. It also disrupted the economic growth in terms of depth and pace. With that, this pandemic also impacted the taxes in different economies.
Tax plays its part in the economic growth at least in three ways. First of all, taxes are an evident source of government revenue. So, it would aid people in having access to commodities and other necessities of life.
Secondly, it is indisputable that the vulnerable economies would be more affected by this pandemic. Its effects are long lasting, and countries would be affected in the long run. So, the increased tax rates would work as a catalyst to gain economic growth and prosperity.
Lastly, the taxes would help gain sustainable long-term development goals. Therefore, countries are in dire need of a smooth taxation system. The government should adopt a trust-building approach before increasing the taxes. The temptation to widen the tax base would only affect the poor.
Therefore, one must refrain from doing so and instead follow the proportional method of taxation. Shortly, there should be equity in the taxation system for people belonging to various interest groups.
That would be a better and just system of increasing the tax rates. All in all, the tax plays its adequate role in coping with this novel covid-19. It can help in bringing the economy back to its pre-covid-19 condition. Covid-19 has provided all the countries with unproductive tax policies to improve their taxation system.
Here the main question arises if there will be any rise in taxes to deal with covid-19 in the United Kingdom.
Will there be a Rise in the Taxes to Deal with Covid-19?
The chancellor of the exchequer of the United Kingdom decided to extend the funding for companies and individuals until September. That for sure will inflict an unparalleled economic cost on the UK economy. Also, the novel Covid-19 left people with fewer choices of going for better decisions.
Chancellor Rishi Sunak will presumably have to face two main obstacles in 2021. He would aid businesses that have been affected by the pandemic. Further to that, he would formulate policies for economic accomplishment. Keeping a trade-off between the two is a tough challenge.
In such scenarios, the United Kingdom will either raise taxes or limit spending. There is no other option left to deal with this crisis. Similarly, the tax system is an imperative component of the economy. Without it, the economy will face utmost difficulty in funding public projects or distributing funds to the least fortunate.
But it is not just the amount raised that is important. According to the Mirrlees analysis of the UK tax system, the way these schemes are structured matters immensely to the economic welfare.
According to the facts, the taxes account for more than half of the government revenue. Keeping that in mind, the British Finance Minister announced the United Kingdom Corporation tax to increase from 19% to 25%. As a result, the countries would be able to mitigate the burden in the better interest of public finances. So, the UK tax after Covid-19 would surely be revised and reformed.
Rishi Sunak, while presenting the budget (in the House of Commons), advertised their plan towards developing the economy. By the half of next year, the nation is supposed to be back to its pre-covid-19 levels. For now, the main priority of the UK government revolves around coronavirus vaccine rollout.
Besides, it is clear from the estimates that the economy would expand by 4% in 2021 and 7.3% in 2022. On the contrary, the growth will decline by 1.7% and 1.6% in the preceding years.
So, the main aim of the country would be assisting citizens and British companies. The UK government cannot afford to ignore the road to recovery in the long run. Therefore, it is keen to rebuild public finance and shape the future economy simultaneously.
In response to that, the UK government also decided to extend the Furlough Scheme till 30 September 2021. Employers would still pay furloughed employees 80% of their regular salaries up to £2,500 a month.
According to the Office for Budget Responsibility (OBR), the independent economic forecaster, government borrowing for the 2020-21 fiscal year is on target to meet the estimate of 355 billion.
However, the government borrowing might increase by £278.8 billion in the upcoming year. As a result, the total debt would sum up to £1.125 trillion and the debt-to-GDP ratio to 97.5 percent in the United Kingdom.
Luckily, the public finances figures depict that the recovery would be smoother than the anticipation made by OBR. It implies that borrowing could be lesser than the expected published figures that are a pleasant thing.
The Novel Covid-19, Government Expenses, and the Increased Tax Rate in the UK:
The novel covid-19 and the constraints it created left a substantial effect on the UK economy. Alone for the fiscal year 2020-2021, government spending increased by 31%. Whereas the revenue decreased by 14%, which is not a favourable situation for the country.
Similarly, The Office for Budget Responsibility (OBR) estimated that failure to offer subsidies to businesses and households would result in immense economic damage. That could hamper the road towards economic growth than ever before.
There does not seem to be any economic growth till the end of 2022 and 2024, respectively. Likewise, there would be more initial debt and on-going borrowing to cover the expenses. So, the UK Government has to cope with all these economic and social challenges.
That would be possible in the following two cases; 1) the rise in taxes or rise in public revenue 2) the cut in public spending.
Now we must have a look at how the covid-19 has impacted the Tax Revenue in the UK;
Impact of Covid-19 on Tax Revenue in the United Kingdom:
The lockdown and economic inactivity led the UK to many problems. The UK economy was on the verge of collapse faced a drastic drop down in tax revenue. The country was in dire need to bring radical changes in its tax policy to regain economic growth.
Luckily, the drastic impacts of Covid-19 on the UK economy were well studied and discussed in the study by Heald and Smith (2020). They presented the facts for the three initial months (April to June 2020). The results clearly showed a fall of 12% in the government revenue that is drastic.
Meanwhile, public spending rose by 36% relative to the previous year. The UK government faced the worst deficit of £1,984 billion (99.6 percent of GDP), the highest level since March 1961. (ONS, 2020c).
As a result, the chances of tax reforms by the UK government to help stimulate the economy and provide covid-19 relief initiatives have increased twofold. Also, The International Monetary funds (IMF) suggests the UK government cut taxes to re-start the economy and uplift the industry.
Additionally, the UK government has the aim of building public finances in the long run. That would lead the country towards a more sustainable position. So, the imposition of taxes on personal income and corporates would surely benefit the country in the long run.
Only then, the UK government would better be able to cope with all the budget deficit. Thus, to recover all the corona virus-driven expenses, the CFIs and economists with better strategies should come forefront. That is how they will be able to avoid further harm to the economy.
Wealth Tax Commission and Views about The Increased Tax Rate due to Covid-19:
Due to increased public spending for social and welfare causes, the UK government needs to spend £280 billion on policies to combat Covid-19 and boost the UK economy, including £73 billion on job-support programs.
Therefore, the Wealth Tax Commission United Kingdom stated that if the UK government wishes to increase taxes, it should consider levying the tax on the rich. These policymakers and tax practitioners find it more equitable than raising tax on personal income or consumer spending, VAT, or Corporations.
As a result, they predicted that a 5% flat rate on assets worth more than £500,000 on an “all-inclusive” tax base would raise at least £260 billion.
In response to the proposal, the chancellor, Rishi Sunak, denied it. He made it clear that there is no need for a wealth tax and never will be. So, it is unlikely for the authorities to enact any wealth tax.
However, the Labour Party seemed more interested in the tax proposal. Shadow Chancellor Anneliese Dodds thinks it is too early to implement tax gains to pay for the pandemic, but the consideration for the wealth tax seems favourable.
On the contrary, Mr. Paul Johnson (Director of the Institute for Fiscal Studies) clarified when they would increase the taxes. He emphasized that they would likely implement the tax increase over the next two to three years. Till next six to eighteen months, there will not be any increase in the taxes.
According to him, the United Kingdom tax levels are currently lower than those of other advanced economies. The public finances are on an uncertain long-term route. The global pandemic badly aggravated public spending. The additional tax revenue may assist in solving this issue and bring the country back towards economic growth.
Well, it is up to the UK government to consider the entire tax system. They need to ponder on how they can raise taxes without increasing the economic risk further. The tax increase or spending cuts alone will jeopardize the desired rapid recovery.
As a result, the correct reforms have the potential to accelerate economic growth. It also increases corporate investment and job creation. Thus, well-planned tax reform can benefit both the country and the businesses along with individuals.
Economic Reliefs in the United Kingdom
British came up with several schemes in the initial months of the pandemic. The aim behind those schemes was to help people who had economically been affected by the outbreak. The govt. has already extended the furlough scheme till October.
Likewise, the UK government also introduced the Term Funding Scheme with additional benefits for Small and Medium Enterprises (SMEs). It initiated the plans to provide four-year funding of at least 10% of the individual stock for the economy lending at interest rates at or close to the bank of England base rate.
Aside from that, the Coronavirus Business Interruption Loan Scheme (CBILS) assisted small and medium-term enterprises with revenue below £45 million. Under the scheme, it provided the business loans and overdrafts by the British Business Bank.
Similarly, the UK government also gave full support to promote and help small businesses. Under this scheme, they granted companies a one-time payment of £10,000 to help them cover their operational costs.
Subsequently, the business falling under the retail and hospitality sector plus restaurants are supposed to pay no business taxes for the year 2020/2021-tax year. These apply to all firms, regardless of their size.
All in all, the Self-Employed Income Support Scheme, Statutory Sick Pay, Coronavirus Job Retention Scheme, and VAT Deferral are some of the other schemes by the UK government to support its people.
Decrease in Public Spending
The chancellor said in his Budget speech that he was hesitant to slash public funding. The National Health Service (NHS) plays an important role, and it will be impossible to cut health budgets following a major pandemic.
The chancellor proposed several changes to cut public debt in November, including a disputed move to suspend salaries for various public sector jobs. He has reduced the amount of money the UK would spend on foreign assistance, including a manifesto promise to keep it at 0.7% of GDP.
The UK government borrowed a handsome amount to mitigate the effects of coronavirus. These initiatives were costly, and the public revenue was affected by the increasing expenses and diminishing income. According to the most current results, the UK government borrowed £303.1 billion in the fiscal year ending in March. So, it would be beneficial for the UK government to decrease public spending.
Conclusion
After viewing all the facts and figures plus the estimations, we conclude that the United Kingdom, for sure, needs tax reforms. For that, they may face significant political or other challenges in reforming it. Therefore, the reform should be there to address all the inefficiencies that woke up in the face of Covid-19.
After spending so much on the health and social care of the public, public spending has increased. The increased tax rate would help the UK government in strengthening Public revenue. The higher the earnings, the greater the ability to pay the debt.
The additional pressure on the UK government due to Covid-19 might increase in the future. As a result, the UK government will need billions of pounds to clear all national debt. Over recent decades, we do not see any effective tax change in the taxation system in the UK.
As a result, the previous decisions only ignited the need for tax reforms, which the administrations have failed to implement. Previously, the very recent UK chancellors and Prime ministers predicted that the risk of undertaking tax reform would be heavy, and thus have been hesitant to try it.
The tax reforms are supposed to overcome all the barriers, instead of short-term political wins only. Otherwise, the economists and policymakers would only end up harming the economy.
Though, the pandemic amplified the public finance challenge around the globe. But setting out clear objectives makes the implementation of tax reforms easier. Therefore, any tax reform should be equitable and economically efficient.
Almost every country is struggling with increased public debt as a result of the Covid-19-induced recessions. In its October 2020 Fiscal Monitor, the International Monetary Fund (IMF) estimated that the total of all government deficits in 2020 would be 14.4 % of GDP for industrialized countries, 10.7 % for developed and middle-income countries, and 6.2% for developing economies.
However, for the evolution of tax policy in the post-Covid recovery phase, the policymakers need to provide several recommendations. On the other hand, fiscal stabilization may even be achievable without tax hikes.
By now, the UK government has to deal with three main problems and find a solution. Lockdown has resulted in massive unemployment and company bank losses. Therefore, the UK government must be active in dealing with the short-term consequences. They need to bring people back to work and resume growth, and most importantly, fiscal stabilization must be their concern in the long run.
Overall, it has become vital on a global level that tax authorities accurately foretell the future developments in the tax landscape. Similarly, they need to explicitly communicate to all the stakeholders the consequences of those changes.
The writer, Joseph Attah is the pioneer Managing Director/CE of Adroit Accountants Limited. An accountancy and taxation service provider firm in the heart of the city of Ipswich in Suffolk county of England.
References List:
Heald, D. (2020, September 3). The accounting, budgeting and fiscal impact of COVID-19 on the United Kingdom (R. Hodges, Ed.) [Review of the accounting, budgeting and fiscal impact of COVID-19 on the United Kingdom]. Emerald Insight. https://www.emerald.com/insight/publication/issn/1096-3367
Senol, Z. (1 C.E., January). CORONAVIRUS (COVID-19) AND STOCK MARKETS: THE EFFECTS OF THE PANDEMIC ON THE GLOBAL ECONOMY (F. Zeren, Ed.) [Review of CORONAVIRUS (COVID-19) AND STOCK MARKETS: THE EFFECTS OF THE PANDEMIC ON THE GLOBAL ECONOMY]. Eurasian Journal of Researches in Social and Economics (EJRSE).
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