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Budget tax hikes would bring disaster

Summary:
Just when we can finally see the end of lockdown and life possibly returning to some sort of normal, we have a flurry of rumours that the Chancellor is about to shoot the recovering economy in the foot with all sorts of tax rises.This would be a disaster, and the people it would hit worst would not be ‘the wealthy’ or ‘big corporations’, but young people looking for their first jobs.Before coronavirus, the government was taking over 37% of the economy in tax, and even if the Chancellor does nothing in the Budget, that is expected to rise to around 39% (because although tax revenues are dropping, the economy is dropping faster).That is dangerously close to the top level that an economy can bear without suffering badly. Yes, other European countries have higher levels of tax (although

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Just when we can finally see the end of lockdown and life possibly returning to some sort of normal, we have a flurry of rumours that the Chancellor is about to shoot the recovering economy in the foot with all sorts of tax rises.

This would be a disaster, and the people it would hit worst would not be ‘the wealthy’ or ‘big corporations’, but young people looking for their first jobs.

Before coronavirus, the government was taking over 37% of the economy in tax, and even if the Chancellor does nothing in the Budget, that is expected to rise to around 39% (because although tax revenues are dropping, the economy is dropping faster).

That is dangerously close to the top level that an economy can bear without suffering badly. Yes, other European countries have higher levels of tax (although overall not by much - the average was just over 40% in 2019), and 39% would have still left 11 European countries with higher taxes than us.  But they are not a good example to follow because they generally have shamefully high levels of youth unemployment.  

Even in 2019 (before coronavirus and well after the banking crisis) France had a youth unemployment rate of 20%; Sweden was similar; Italy’s rate was 30% and Spain’s even higher – is that really something we want to copy?

There is a clear link between tax levels and the economy’s ability to create jobs, as the graph below shows – as overall tax levels rise (towards the right of the graph), the number of new jobs created falls.  More importantly, it falls off a cliff once levels go over about 42%.  In the period examined, every EU country with long-term tax levels below 42% of GDP created at least 10% net new jobs, but none of those above 42% were able to do so (the graph does show one, Italy, that just creeps over the line, but its subsequent performance suggests that was unreliable statistics rather than an economic miracle).

Failing to create new jobs is not so much of a problem for those already in work (although with many losing their jobs due to lockdown, it will increasingly be so for them as well), but it is a huge problem for young people looking for their first job – hence those shockingly high youth unemployment rates in Europe’s big high-tax countries.  That is what we are risking if the Chancellor pushes up taxes in the Budget.

Tax levels in the UK were getting into the danger zone even before the virus hit us, and even if the Chancellor does nothing, the drop in the economy over lockdown will mean that the government is already taking nearly 40% of the nation’s income in tax.  Any tax rises risk pushing us off that job-creation cliff.

Not only would that cause the huge personal problems of unemployment, it would also be counterproductive as, with fewer jobs, those tax rises would bring in less and less extra revenue.

I would not normally advocate increasing government borrowing, but in this case the money has already been spent, and whether or not it was spent wisely, it was in response to an emergency.  We can do nothing about that.  But what we must not do is stamp out the post-virus recovery before it even gets underway by raising taxes now.

Yes, in the medium term we need to get government finances back into line, but that needs to be done through economic growth and long-term spending restraint, not crippling tax rises.

There is a good argument that the people hit hardest by the lockdown are those in their late teens and early 20s.  They have seen their education sacrificed – schools and universities closed, training and apprenticeships reduced, workplaces closed so that, even if they have a job, they cannot pick up that vital early practical experience that the rest of us benefited from.  Not to mention the isolation and the lack of social activity that is so important at that age – the experiences lost, the relationships never formed.

After suffering from lockdown, is it fair that the country’s youth also bear the brunt of the cost of the recovery?

By Richard Teather

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