What will they tax to pay for the COVID-19 crisis?

TruePublica Editor: The COVID-19 crisis is first and foremost one of public health. We have no idea of what it will leave in its wake in terms of broken families by the time the virus is contained. Will there be a second and third wave, will it be worse, how long will it last, when will we get back to normality? These questions being asked inside the lockdown, automatically lead on to the next crisis – one of economic devastation.

As each day passes, people die and as each day passes another business of significance goes bankrupt. The trade-off between life and the economy is an inevitable question and a decision has to be made.

Those politically inclined to the left will, on balance, choose life and those on the right will, on balance, choose the economy. There is no answer. They are intertwined in reality and ideology. The big problem now is that we have a government incapable of making this decision. Only a unity government – advised independently by our best scientists and experts can come to a conclusion – and even if that was the case, half of the population would disagree.

But when the virus has passed, when the lockdown has come to an end, whenever that is – what will Britain be facing?

Leaving aside the human experience of this crisis – the death, the isolation, the job losses and bleak future prospect for millions, we are also looking at financing the cost of it all. Sure, we can add another trillion to the national debt, which will cost something like £100bn a year to service, but what else is the government of the day going to do?

Taxing business any further than it is already is going to be almost impossible as whatever is left standing will be repairing balance sheets and paying back debt, which will offset taxes from any profits.

Revenue to local authorities will have crashed and their balance sheets severely impaired leaving many services in the crosshairs for culling.

Commercial property values will plummet. In fact, right now, who would buy any commercial property given that it could well be half the price in a year from now, maybe less.

Residential property will also fall. It will take some months before the house-buying public fully realise what the knock-on effect to a house owning economy is going to be – but when they do, the housing market will seize up first, then fall month on month as desperate unemployed owners part with their castles to a vulture class looking for a deal.

Over 80 per cent of all bank debt in Britain is loaned on property. The banks, to all intents, will be technically insolvent at some point this year. The government will have to step in, once again, and (technically) bail them out.

By the time we reach Christmas, we will know much more about the true state of the economy.

Between 2016 and 2018, the Office for National Statistics estimated that total UK wealth had surged 13 per cent to £14.6 trillion with rising property values and pension pots accounting for most of the gains.

Over the longer term, average wealth at the bottom has stagnated while the wealthiest have enjoyed significant gains. A person in the bottom tenth had total wealth – including property, pension, financial assets and possessions – of £3,700 in 2018, around £100 less than they had in 2010.

For the top tenth, wealth jumped by more than a third over the same period, from an average of £1.8m in 2010 to £2.5m in 2018. This group holds 45 per cent of all wealth in the UK, while the poorest 10 per cent hold just 2 per cent.

No doubt there will be all sorts of incremental tax adjustments, all just eating away at the corners of wealth, such as reducing dividend or Isa allowances but broadly speaking, there are only two taxation targets of real wealth left for any government when thinking about a budget. The first are pensions. Total private pension wealth in Britain is about £6.5 trillion. However, if the economy crashes so will share values, commercial and residential property – potentially wiping off at least a third of its overall wealth as pension are usually heavily invested in some or all of these asset classes

Any tax breaks on pension savings will surely be in the sights of government. Will pension pots over a certain amount be taxed as well?

Bank deposits may be another target. Will there be a haircut on savings on say – uninsured amounts above £75,000? Will they impose negative interest rates to force money into a deflationary or flatlined economy?

Will there be new taxation rules for landlords? Will landlords be forced to give rent holidays to those who are unemployed to save the government money? Don’t forget there are over 2.6 million landlords in Britain with 5.4 million buy-to-let properties. Many of these landlords depend on the rental income as their own income and a great many more are paying mortgages. Could second homes attract big council or central government tax rises – or both?

The only reason why I pose these questions is simply to let TruePublica readers know what is blindingly obvious. There are grades of devastation to the economy due to this virus and it wouldn’t surprise me to see the government attacking anyone with assets, no matter what those assets were. Don’t think this could happen?

The Cypriot bailout (and bail-in) in 2013 as a result of the financial crisis meant Germany coughing up about £11 billion to save it from financial armageddon, and, in exchange, Cyprus was forced to levy a “one-time” tax on bank deposits to raise an additional £6 billion. That tax, imposed on an extended bank holiday took 6.75 per cent from insured deposits of €100,000 or less, and 9.9 per cent from uninsured amounts above €100,000 (currently £75,000 in UK banks). Depositors were told that they will get bank stock equal to whatever they lose from the tax.  Five years later in 2018, the stock was literally valueless and nothing was ever paid back.

Don’t ever think a modern so-called democracy won’t steal money or assets or punitively attack wealth when their backs are against a wall. Some may welcome it but if that happens it will be a generation before any investors look at Britain again.

 

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