Will Increasing Uk Tax Rates Accelerate Recovery?

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Times have been harsh in good old Blighty. Not only has the UK been hit harder than most by the global economic recession, but in order to save the country from a very shady future the government has had to support the economy with billions of pounds. But where did these billions come from? Well, continuing in the same excessive principle that caused the credit crunch in the first place, they were borrowed. Despite how ironic it may sound, in order to help the British public recover from a very long period of spending more than they earn and borrowing beyond their credit limit the UK government is being forced to do exactly that.

Currently the national debt in the UK stands at about 60% of GDP. Although this sounds rather discouraging, compared to other countries within the Eurozone or around the world it's actually considerably normal. For example, in the US the national debt stands at around 90% of GDP, Japan's national debt is over 200% of its GDP, and in the years following the Second World War the UK owed almost 250% of GDP. The real problem lies in the fact that the UK currently has a budget deficit that is predicted to hit 220bn this year, equating to 12% of current GDP and limiting our ability as a nation to reduce our debt in a timely manner.

According to John Hawksworth, Head of Macroeconomics at PwC, the government will need to raise an additional 26bn each year to close a fiscal gap of 3% of GDP by 2016. The government have given themselves until 2018 to reach this target, but PwC are less optimistic. The model for raising this amount of revenue annually is to increase taxes across the board, including income tax, VAT and National Insurance.

Tax hikes are the last ditch option for any government, and is not a decision to be taken lightly, especially in the final build up to a general election in 2010. If not, then what other option is there? So far, the main focus for reducing the budget deficit is on cost cutting. The Public Sector is currently under scrutiny as the major source for these spending cuts. Cutting spending though simply isn't going to achieve the desired result. The major revenue generators within the economy will need to be adjusted, and taxation is the prime candidate. The Eurozone is a comparatively high taxation area, and in the UK tax revenues account for around 35% of GDP. Adjusting income tax rates would certainly have a beneficial effect on balancing the budget books.

Almost certainly the solution lies in a carefully balanced approach of cutting public spending and raising taxes. But will any new government brave the public backlash that will almost certainly follow any tax hikes? Only time and a general election will tell.

by: David Green

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