This note roughly costs some policy alternatives to the Sunak/Hunt approach . It supplements my previous post that examined the implications of the Chancellor’s autumn statement. That included some suggestions for an alternative strategy. This post tries to put some rough numbers on their potential impact, looking specifically at:-
- A closer relationship with the EU, broadly equivalent to re-joining the single market.
- A set of tax changes along the lines proposed by TaxJustice.UK.
Estimates of the impact of BREXIT on the UK economy vary widely though most economists acknowledge that it has been negative and significant. The OBR estimates that the UK economy by the end of the decade will be 4% smaller because of BREXIT. I have assumed that a decision to re-join the single market would boost GDP growth sufficiently to recover this, reaching a level of GDP in 2007-8 that is 4% above the level forecast by the OBR if the Sunak/Hunt proposals are implemented. The boost amounts to an average increase of 0.75% p.a. over the five-year period. The implicit assumption is that any costs of re-joining have been netted out from this figure. That is not unreasonable given the very high cost of additional administration to undertake roles that were not required when we were members.
With tax: GDP unchanged from the OBR forecast, the higher GDP growth from a decision to re-join the single market would on these assumptions raise Government revenue by amounts rising to £47 bn by the final year of the forecast (see Table).
TaxJustice.UK estimate that the UK could raise £37bn per annum from a range of tax measures primarily aimed at the better off, and particularly at wealth and at capital gains. These include introducing a wealth tax (raising £10 billion per year), taxing capital gains at the same rate as income tax (£14bn), applying national insurance to investment income (£8.6bn), reforming non-dom status (£3.2bn) and closing inheritance tax loopholes (£1.2bn). I have assumed that the additional taxes would be implemented in full by 2024-25, and revenue would then grow in line with nominal GDP. The TaxJustice.UK analysis usefully illustrates that increased revenue raising from those who could most easily bear the burden is feasible on broadly the scale proposed.
Revenue Impact of Re-Joining the Single Market and Implementing TaxJustice.UK Proposals
£ Billions, Cash
|Financial Year ending||24||25||26||27||28|
|Re-join EU single market: Additional tax revenues from increased GDP growth||4.75||12.36||22.99||34.57||46.96|
|Additional Revenue from Tax Justice proposals||18.00||37.00||38.55||40.46||42.47|
|Total increase in Government revenues (£Bns)||22.75||49.36||61.54||75.03||89.43|
|Equivalent to a % increase in Government spending of:||1.9%||4.2%||5.1%||6.1%||7.0%|
The additional revenues could be used to fund any combination of higher public spending, reduced taxes on the lower paid, or faster progress towards reducing the deficit and hence the cost of servicing it. The additional revenue builds up to be equivalent to 7% of the currently proposed level of public expenditure in 2027-28.
The analysis is very crude. It will doubtless be argued that the assumed growth boost is on the high side. On the other hand, the estimate does not take account of some other significant positive impacts. For example, higher growth will reduce pressure on the benefits system, releasing resources for other spending. The post also ignores the potential impact on the cost of Government borrowing. It could be plausibly argued that markets would be reassured by a commitment to policies that will raise economic growth and do away with the need for public expenditure cuts that are economically damaging and politically unrealistic. A 0.5% cut in borrowing costs would save an additional £14 bns per year but would still leave HMG borrowing costs above those of Germany and France.
Though crude, the post illustrates that resources could be generated that would be sufficient to transform the miserable outlook currently facing those on middle and lower incomes. We could improve the safety net, shield them from increased taxation, and still have resources left to begin to address the need for higher public spending.