LONDON (Reuters) – Worries of a wealth tax to help cut government deficits built up during the COVID-19 pandemic may see households keep “rainy day” cash savings higher for longer, with a potential drag on the economy and markets as a result.
Although the first vaccines have only just begun, the debate about how governments rein in huge deficits and borrowing incurred by their emergency supports is well underway.
And some reckoning, however soon or severe, is almost certain.
Most investors assume massive central bank bond buying will buy time by capping long-term borrowing rates, perhaps for several years as long as inflation stays low.
And a quick return to brisk growth along with a variety of spending and stimulus plans should rebuild tax revenues.
But in Britain, often criticised for overzealous austerity measures after the banking crash 12 years ago, talk of tax rises and spending curbs is already out in the open.
It is unlikely to an outlier for long if the vaccines work.
Although British finance minister Rishi Sunak has opposed wealth taxes, an influential study this week outlined how they may be the fairest and most effective one-off measure to help plug a gap forecast at nearly 20% of national output this year.
The report by Warwick University and London School of Economics researchers – funded by the British government’s Economic and Social Research Council and informed by tax and legal experts worldwide – reckoned a one-off 1% tax on net wealth over half a million pounds over five years could raise more than 260 billion pounds ($351 billion).
That’s about two thirds of this financial year’s entire budget shortfall.
The Wealth Tax Commission suggested it would be levied on housing and pension assets over 500,000 pounds, or double for two spouses in one household, and hit about 8 million people.
Total take would be the equivalent of raising all income taxes or value added tax by 6 percentage points, it said.
“Governments have made radical changes to taxes when there has been public understanding that change is needed,” former UK civil service chief Gus O’Donnell said in a foreword, citing one-off taxes on banks after the 2008 crash and on utilities.
“There is probably more public acceptance of the need for change than in normal times.”
DEATH AND TAXES
There’s little doubt wealth taxes would be the most popular tax raising measure and the report cites public attitude polling to support it. What’s more, a YouGov poll from May also showed enthusiasm for a tax with less strict measures and 61% favour targetting assets worth more than 750,000 pounds, excluding homes and pensions.
What’s also true well beyond Britain is that inequality is very much in the crosshairs for policymakers, even including central banks, not least because some of the poorest in societies were worst affected by this year’s health crisis and mandated economic slump.
The incoming U.S. administration of President-elect Democrat Joe Biden is also highly likely to focus more squarely on this as it reshapes domestic economic priorities.
And, as spotlighted by French economist Thomas Piketty since 2014, the most egregious gaps are in wealth inequality and asset holdings, over and above already large income inequality per se.
Charities and poverty campaigners broadly welcomed this week’s proposal while conservative commentators feared the potential disincentives to business owners and employers living in or planning to come to Britain.
But one sharp criticism is the extent to which parts of the UK were more prone due simply to inflated house values. And more broadly some fear many caught in that net are ‘asset rich but cash poor’ – such as pensioners or small business owners.
In other words, many may struggle to pay and be forced to either sell liquid assets or build – or in some cases sustain – cash reserves to meet the bill.
“There is a serious question around how someone pays a wealth tax if they do not have the immediate cash liquidity,” said Nimesh Shah, chief executive of tax and accounting firm Blick Rothenberg.
This raises issues about the wider recovery.
Spiking household cash holdings – even if concentrated in middle to upper income earnings – have been one peculiarity of this lockdown shock due to work-from-home capabilities, job furloughing and income supports.
But it has also been a factor fueling optimism about both the eventual recovery, on the assumption all that excess cash is spent again as economies reopen, and in financial markets as some of it is invested with deposit returns now near zero.
And so, much as 18th century economist David Ricardo’s proposition of ‘equivalence’ suggests, there’s a risk the public view of large government budget gaps may simply be to hoard cash to brace for inevitable future tax rises.
If they do, then a much-touted spending and asset price windfall from falling savings rates after the pandemic may not fully materialize – dragging on recovery for years to come, not unlike the post-2008 slow-growth funk that austerity fostered.
But if that has to happen, policymakers may calculate that a hit to asset holders seeing values inflate again, rather than low-paid public sector and health workers or benefits that took the hit last time, is the least worst option.
For a graphic on Savings Stash:
— The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own —
(by Mike Dolan, Twitter: @reutersMikeD; Editing by Alexander Smith)