Following the news on Treasury documents detailing plans for a rise in income tax, Nigel May, Partner at MHA MacIntyre Hudson, says tax rises could kill demand if the chancellor doesn’t play his cards right.
“The Chancellor and the Treasury face a dilemma. We are in a situation where the economy, and the employment market in particular, is effectively on a ventilator in the shape of the job retention scheme. Somehow the patient has to learn to breathe on their own again.
“To avert a sovereign debt crisis the Treasury may need to raise taxes significantly. However, restarting the economy entails creating demand, while reducing take home pay through income tax rises, or increasing prices with a VAT increase (something the government may also be considering) would constrain demand.
“This is why governments have sometimes responded to these situations by cutting taxes. In 2008/09 Alistair Darling reduced VAT to 15% to try to stimulate demand. If the government do push ahead with tax rises and thereby depress demand, this could start a negative economic cycle which would still be firmly in voters’ minds come the next election.
“Further details about the plan will come to light soon. Businesses and workers need to be aware that the three big revenue raisers are income tax, national insurance and VAT. Today we heard about a potential for an income tax rise but changes to national insurance and VAT could potentially be on the horizon too.”