Furlough Scheme Debt-Who Will Pay for It?

The Coronavirus pandemic has had a huge impact on all aspects of society, both socially and economically. Some industries have been more severely impacted than others, the worst affected industries include travel and transportation, retail, entertainment, hospitality and manufacturing.

To prevent a total collapse of industry, the pandemic has forced the government to find economic solutions for employees, businesses and the self-employed whilst the economy remains hamstrung.

The largest pandemic expenditure has been the furlough scheme, which pays up to 80 percent of affected workers’ wages, this scheme has been in place for nearly a year, it was due to end in November 2020 but Rishi Sunak was forced into a last-minute extension of the scheme until April 2020 when it became clear Covid-19 was surging and new restrictions would need to be brought in. All indications point towards a further extension of this scheme but at the time of writing there is no confirmation of this.

Current unemployment figures show the UK has a 5.1 unemployment rate, the highest it has been since 2015. Without the support of the furlough scheme, it is likely that the number of people unemployed would be much higher.

HMRC figures show that £3.4bn worth of claims were made between 15 November and 13 December, taking total claims to £46.4bn and The Office for Budget Responsibility forecasts that borrowing is nearing £400bn.

The Question is, as we work our way to the reopening of the economy and end social distancing restrictions, how is this huge bill going to be paid for, and by who?

Here are a few options:

1. Potential tax hikes- Income Tax, VAT, and National Insurance 

It appears that increased taxes for both the wealthy and the lower earners are being considered. The scale of the revenue needed due to lost growth and huge bailouts could be as much as two per cent of national income- roughly £44billion.

VAT may also be increased and added to products and services where is not currently being charged.

2. Introduction of New Taxes 

It is very likely that we will see new taxes introduced to help the government with the huge coronavirus debt. Examples of this are a potential ‘mansion tax’ which might be an annual charge of 1% of the value of any properties worth over £2m. Another new tax may be an ‘online sales tax’ which might involve a 2% tax on online sales.

3. Corporation Tax Increase 

The rate of corporation tax currently stands at 19%, but there were previous commitments outlined in the 2016 Budget to reduce the rate to 17% from April 2020. Back in September, it was reported that Chancellor Rishi Sunak was considering raising corporate tax from 19% to 24% to help pay for the COVID bill. We will know more in March when the chancellor delivers his 2021 budget.

4. Increased taxes on pensions & investments 

From the beginning of the coronavirus outbreak, stock markets have fallen considerably and are likely to remain volatile for a while. Currently, pensioners can take up to 25% of their pension pot tax free, but more than 25% there are usually tax implications to consider. The government may decrease the tax-free amount or increase the tax percentage currently in place.

5. Introduction of Austerity measures

There could be austerity measures introduced to balance the books and get back on track after the pandemic. The government seems to think of austerity as a last resort right now, as austerity implies policies which may reduce aggregate demand and increase unemployment.

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