With the country’s people and economy already feeling the pain of the covid-19 pandemic, Neil MacGillivray warns of the further pain set to follow, when we have to foot the financial bill…
The Office of Budget Responsibility estimates the costs of a three-month lockdown to fund the likes of the Coronavirus Job Retention Scheme, Self-Employment Income Support Scheme, business grants and tax deferral schemes will increase government borrowing for this year by £273bn.
To put that into some sort of perspective, the total raised in taxes in 2018/19 was in the region of £620bn and current National Debt is, give or take a pound or two, £1.84trn. If we go back 15 years National Debt was a mere £0.5trn.
In terms of Gross Domestic Product (GDP), the National Debt in 2005 was about 38%. In the wake of the 2008 financial crisis, and subsequent recession, the debt more than doubled and was 84.6% of GDP by March 2019.
Though there was a levelling off over the last few years, this current massive hike in borrowing could mean the National Debt hitting 100% GDP by the end of the year.
One thing that is abundantly clear is that once the pandemic crisis is over the government will be left with a massive financial burden, the likes of which have not been seen since the Second World War. So, what are the options?
The government previously pledged not to increase the headline rates of income tax, VAT or NICs, but as we're constantly being reminded these are unprecedented times we're seeing the first inkling of a U-turn.
When the Chancellor, Rishi Sunak, announced the support to be given to the self-employed, he highlighted the big differences in the National Insurance Contributions (NICs) paid by the self-employed and employees.
He said: "It is now much harder to justify the inconsistent contributions between people of different employment statuses." An increase in NICs for the self-employed may well be on the way; the Chancellor having not yet denied this possible course of action.
The rate of NICs is a significant tax advantage for the self-employed compared to that of an employee. The main rate of NICs the self-employed pays is lower at 9% than the rate of 12% paid by employees, and the self-employed face no equivalent of the employer NICs, currently charged at 13.8%.
For an employed person receiving £50,000 of income this tax-year, the total tax liability, factoring in employer and employee NICs and the individual's income tax, would be £18,047, compared with £11,145 if this income was generated through self-employment.
While it's true the self-employed have reduced entitlement to some contributory benefits, they've still paid less into the National Insurance Fund relative to what they're entitled to receive.
In the past, the size of this subsidy has been put at around £3 billion a year. NICs raised an estimated £136,644bn in 2018/19. However, Class 4 NICs which are paid by the self-employed, only make up about 2% of this total, so any increase in the rate would have little impact on its own.
The Office of Tax Simplification has long held the belief that the NIC scheme is not fit for purpose. They have recommended that NICs should be aligned with the rules on income tax and it has been suggested that it could then also apply to income from other sources, such as savings, pensions or benefits. It has also been put forward that those still in work and over state pension age should not be exempt from employees' NICs on their earnings.
Even if all these suggestions were to come into play, there would be little impact on the forecast National Debt. These actions would be the equivalent of giving someone an aspirin when an anaesthetic is required in the short to medium term, before the Chancellor has to get involved in the equivalent of a full ICU intervention to deal with the fallout from this pandemic.
Neil MacGillivray is head of technical support at James Hay
Put back to April 2021
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