UK Needs Tax Rise for Financial Safety

April 30, 2010 Taxation in UK

Dirty MoneyA new report from a prominent UK think-tank has recommended increases to personal taxation, and full implementation of Value Added Tax (VAT), along with significant public spending cuts. The proposed changes are claimed to be necessary in order to decrease the Government deficit sooner.

On April 30th UK’s National Institute of Economic and Social Research (NIESR) released the quarterly Prospects for the UK Economy report, which valuates the current state of the UK economy. According to the report, the UK economy is in worse shape than commonly portrayed by politicians, and drastic changes will need to be made to rectify the situation. The report suggested a six pence per single pound increase in income taxation and that a full rate of VAT should now be charged on all applicable purchases, with food and children’s clothing being the only exceptions. Even with these measures, the NIESR warns that significant cuts in spending will need to be made to reign in the UK’s swollen debt-to-GDP ratio.

The report warned against initiating any drastic fiscal policies until the UK economy achieves a level of sustainable recovery. Ray Barrell, NSIER Researcher, elaborated, saying that while debt reduction is necessary, it was not worth “killing the economy”. The possibility of the NSIER recommendations being carried out is clouded by the upcoming May 6th UK election. Ray Barrell, explained, “It will be hard to get politicians to propose higher taxes and lower spending before the election, but they will have to do so afterwards.” According to a NIESR, even if a political party chooses to implement their proposals exactly, the UK’s net debt will not fall below 40 percent of the GDP until 2027. Although, the NIESR warned that continuing on the current fiscal course will require 50 years to achieve the same 40 percent debt ratio results.

Photo by Caro Wallis