Look at tax system as we come out of crisis, says IFS

12 Jun 2020

The Treasury Committee invited Torsten Bell, Chief Executive at Resolution Foundation, Paul Johnson, Director at Institute for Fiscal Studies, Dr Gemma Tetlow, Chief Economist at Institute for Government, and Giles Wilkes, Senior Fellow at Institute for Government, to give evidence in its inquiry on the economic impact of coronavirus, this week.

Chair Mel Stride asked for opinions on the various schemes for employed and self-employed. Paul Johnson was slightly surprised that there has been no ‘honing’ of the financial support schemes, and despite the extension of the CJRS there is no capacity to differentiate by sector. Torsten Bell spoke about the very big differences in the income replacement rates that people have seen. Bell added that the sectoral variation is probably six times as high as we saw during the financial crisis. Giles Wilkes commented that if the Government had absolute perfect foresight and design in advance, they might have wanted something that was attuned to the reported revenue fall that comes from the companies.

Stride said the committee thinks there must be some kind of solution to the dividend in lieu of pay issue, ‘maybe paying out and then clawing back later if they find that mistakes have been made, along with some penalties, etc.’ Bell remarked you would open up an unfairness, in principle: if these are genuinely dividends not reflecting labour income from past behaviour, then why are you treating them differently to other kinds of dividend income?

Stride asked about the Government's approach to loans. He also spoke about his concern that businesses are saddled with debt at exactly the time that we are looking to them to invest and grow the jobs that we will so desperately need. Wilkes said as time passes, guarantees and subsidised lending from the state can start damaging the fabric of the economy. There is a real unfairness issue with keeping some companies alive, too. He complained about lack of commercial scrutiny that the private sector has needed to apply to these loans. It is hard to see how the loans can ever be gathered back in, he said.

On debt forgiveness, Johnson suggested that what the Chancellor might be looking at, either in July or in an autumn Budget, is how to prop up the balance sheets of some of those otherwise perfectly viable companies that are facing problems with their debts, both to Government and to the private sector. Bell said we should be looking at income contingent repayment. He said we should worry that history shows that balance sheet recessions have weaker recoveries than just straight income shock recessions.

Angela Eagle (pictured thanks to Parliament UK), Labour, asked about employment and structural unemployment. Bell said we have forgotten how slow in general history shows unemployment bounce-backs are. We are not seeing an inflation spike this time, so we should not just be assuming that the relatively benign relationship between unemployment and GDP that followed the financial crisis happens again this time. Dr Tetlow said the lesson of the 1980s is, rather than allowing unemployed people to end up permanently on incapacity benefits and unemployment, to try to make sure those people find jobs elsewhere. Johnson added there is going to need to be some direct government investment in infrastructure schemes, green energy schemes, or whatever, which employ people directly. There are going to need to be job subsidies, training programmes and a particular focus on people leaving school especially, but also university, this summer.

Steve Baker, Conservative, asked if the UK is becoming a more interventionist state. Tetlow is not convinced and is not guaranteeing that we end up with a very different shape of state in future. Johnson said a ‘good bailout’ is not just about protecting those companies it is easiest to protect (the big ones), “if we are going to keep a competitive economy going forward it is terribly important to make sure that the small and medium firms… are surviving through this so that we do not move to that much more concentrated market structure.” On loans, he said: “If you do well, having had the loans, you may well be asked to pay quite a lot back, but if you do not then you will not.”

Johnson suggest to Eagle that if you look at the way we have come out of previous recessions and crises, we have not tended to be terribly good at taking opportunities for a more sustainable economy. He said: “I would hope there are opportunities to look at the tax system. In the short run, we are not going to want to raise taxes, because we just need to get through this period and start rebuilding. In the long run, it seems to me unlikely, given the scale of the deficit and, I suspect, the scale of demands for increased public spending in health, social care and so on, that we will get away without additional taxes. That gives us an opportunity, again, to think about the structure of the tax system, from things that would be stimulative in the short run— getting rid of stamp duty on housing, for example—to thinking, in the long run, about how we sustainably fund the health service and other public services we rely on. There are plenty of opportunities to do that in a way that improves the structure of the system.”

On departmental spending, Siobhain McDonagh, Labour, asked about the forthcoming spending review, suggesting it is time to protect local authorities, given that they have been cut by 77 per cent relative to a 2009-10 baseline. Tetlow would not be surprised if we did not see a multiyear spending review happening later this year and it probably would be the right outcome, she said, because if we set out multiyear spending plans and then things move on, and we find out that our priorities for public spending are different, we would want those to be able to be reassessed. Wilkes said we need to start with a conversation about what we need to be spending, and then have an honest conversation about taxes and so forth.

When pressed on the pension triple lock, Tetlow commented that if you want to reassure people that they are going to have higher pensions in retirement, you should have a policy that is easy to interpret and predict how it is going to relate to your earnings or costs of living, rather than a ‘random’ triple lock. Bell said the triple lock is going in its current form at least temporarily, because the OBR is predicting average weekly earnings falls of 7.3 per cent this year being measured (because of furlough), but we will then be measuring an 18 per cent increase in average earnings next year.

McDonagh asked if companies that pay no corporation tax in the UK should be able to access tax-funded support for their businesses? Wilkes cautioned that in this emergency, we are seeing the companies not just in themselves, but as a way of continuing to employ people. He added: “You would have to think very carefully in the Treasury before you did not support a company and risked a lot of redundancy because of quite strong, principled objections to how it operated its tax affairs.”

Bell told SNP’s Alison Thewliss the two big challenges that we are going to be dealing with are unemployment when we thought we were dealing with record employment, and debating the size of tax rises over the first half of this decade.

The financial crisis led to fundamental changes in regulation in the financial sector. What should this recession lead to, asked Thewliss. Bell said on low pay and social care, there are reasons for hoping that, in the way we sorted financial regulation post the financial crisis, we grasp longstanding problems that we already face.

The full session is here.

By Hamant Verma