How can Government help?
Rapidly rising prices are causing real hardship in the UK- especially for the poorest. Fully compensating everyone for the cut in their real living standards would cost £50bn and is neither feasible nor affordable. A more manageable goal would be to maintain the value of welfare payments by making timely adjustments to reflect increases in the cost of living. This would cost roughly £12bn. It would not only maintain the incomes of those wholly dependent on benefits, it would also support the incomes of many workers who have their income topped up by universal credit.
How can help be paid for?
Government can find the money to pay for more help to those in need by borrowing more, cutting spending in other areas of Government, or increasing taxes.
A fourth option is to raise economic growth – increasing the size of the cake available to be divided. Labour have rightly made the point that our difficulties are in part due to low economic growth, part of which is self-inflicted by conservative economic policies. Policies to raise economic growth will not provide a solution to how we finance emergency spending this year, but they are the key to how higher spending can be sustainably funded into the medium to long term. An additional 1% of GDP would generate about £9bn per year in additional tax revenues, as well as reducing expenditure by taking more people out of the welfare bracket. A good place to start looking for a growth bonus would be by improving our economic relationship with Europe: the OBR report says explicitly that the impact of the hard BREXIT remains a significant brake on growth. Rejoining may be off the table, but there remains scope for short term benefits by moving closer to the single market.
Increased Borrowing: unwise at present?
Turning to the three options for financing extra spending in the short term, increased Government borrowing appears unwise at present. Debt interest on Government debt is forecast by the OBR to increase by £30bn in the current financial year, more than double the cost of inflation proofing all welfare payments, and has reached £83bn, equal to 7.6% of Government revenue. The OBR expect this to be a temporary blip, but that depends on the current inflationary episode being quickly controlled and any period of significantly higher interest rates being short lived. Both assumptions already look optimistic.
Spending in other areas needs to be increased -not cut
There is also no scope to finance increased welfare spending by cutting Government spending in other areas. After a decade of austerity, many areas of Government spending were already desperately underfunded before the COVID crisis. The most recent OBR report argues that an additional £5bn is required to make up for the impact of cost increases on other areas of public expenditure.
Taxes are high by UK standards–but not compared to other countries
That leaves increased taxation as the only realistic option for financing increased spending to help households cope with rising prices. This is difficult for both major political parties. The Conservatives already face backbench grumbles at the increasing tax burden, and Labour remain anxious to avoid being labelled as the party of high taxes and spending. But is the hysteria of the tabloid press about high taxes justified?
Taxes are forecast by the OBR to reach 36% of GDP by F2026-27. This is high by UK historical standards, but not by international standards. The institute for fiscal studies, an organisation deeply opposed to irresponsible tax and spending policies, describes such a tax rate as ‘middling’ compared to other wealthy countries in the OECD and EU. The tax: GDP rate is mainly increasing because of sluggish GDP growth for the next few years, held back in large part by the self-inflicted wounds of BREXIT. An exceptional increase in taxes to help us get through a major international crisis would not be unreasonable, and the tax: GDP rate will fall back as economic growth recovers. An extra £17bn of tax financed spending would be equivalent to just 0.7% of GDP. It would still leave our tax: GDP ratio in the middling range, especially as other countries face similar fiscal pressures, and will also be likely to respond with similar measures.
How should extra tax be raised?
Labour has proposed funding additional support to households via a windfall tax on the profits of energy companies. This is a reasonable idea, but it would only raise £2bn – a fraction of what is needed.
Several major reviews have argued that the UK tax system gives excessively favourable treatment to taxation of business and of capital gains, relative to income from employment. The difficulty of taxing capital gains is perhaps the major anomaly. Capital gains tax raises less than £15bn per annum in the UK. The wealthy increasingly fund their expenditure by borrowing against the value of their assets. Borrowing is not income and therefore escapes income tax, while capital taxes are only incurred if assets are sold at a profit. This ability of the rich to avoid tax is both manifestly unfair, and economically inefficient.
Reforming the tax system along the lines recommended by the Mirlees report should be a longer-term aim. However, to help meet the costs of the COVID pandemic, The Wealth Tax Commission developed detailed proposals for a one-off wealth tax on individuals that could quickly raise significant sums from those best able to pay. As just one example, the Commission estimate that a tax of 5% of wealth levied only on individuals with assets in excess of £10 million would raise £43bn. Because it is a one-off tax, it avoids many of the complications and potential tax avoidance that come from having to assess gains and losses each year. It seems well suited to dealing with a national emergency in a way that ensures that those best able to pay bear the biggest burden. An individual with assets of £10million would not face significant hardship in paying £50,000 especially if, as proposed, the payments are spread over 5 years.
Conclusion: Help those who need help, by modestly raising taxes on those who can afford to pay
In conclusion, the Government could afford to finance full inflation proofing of welfare payments, plus other compensation schemes, by raising more tax, with the burden focused on those best able to pay.
One attractive idea would be to implement the proposal for a one-off wealth tax. This is not the only way of raising the relatively modest additional funds required, and the conclusion that spending more is feasible does not depend on the introduction of a wealth tax. The current Government of very wealthy individuals is unlikely to implement such a tax -but opposition parties might want to take note.
 Based on data in the Office for Budget Responsibility Economic and Fiscal Outlook, March 2022.
 Tax by Design, James Mirlees et al, Institute for Fiscal Studies, 2011; and other more recent studies by Stuart Adam, Helen Miller and others available at ifs.org.uk
 Wealth Tax Commission, A wealth tax for the UK: Frequently Asked Questions, Arun Advani, Emma Chamberlain and Andy Summers, LSE, 2020