The Office for Budget Responsibility (OBR) the UK’s official independent fiscal watchdog announced last week that Rachel Reeves had already used up her entire £9.5 billion fiscal headroom. They advised that any further government spending could only come from cutting services or raising taxes, to avoid breeching her own fiscal rules by increased borrowing.
The key fiscal rule (aka the Golden Rule) states that over the economic cycle, the Government will borrow only to invest and not to fund current spending. In layman’s terms this means that on average over the ups and downs of an economic cycle the government should only borrow to pay for investment that benefits future generations.
So, with her boss Keir Starmer this week stating that the UK would have to significantly raise the level of spending on defence, what options does the Chancellor have to avoid breaking the ‘Golden Rule’?
She could copy Scotland
In 2026, anyone visiting Edinburgh, will find themselves liable to pay a new tourist tax of 5%. The new tax will be a 5% levy on accommodation costs but incomprehensively, it will only apply for the first five days of a stay. The idea isn’t wholly original, since cities such as Venice and Barcelona are already taxing tourists.
Edinburgh already has a registration process in place to ensure that the scheme can operate widely, which will include not only hotels and B&B’s, but also individuals subletting their homes through Airbnb. Whilst the tax will bring in benefits throughout the year, the tax will be a money spinner for the month of August during the city’s art festival and especially ‘The Fringe’.
If Rachel were to bring in a tourist tax for England at the same rate of 5%, it would add on average around a fiver to a night’s stay, which is hardly going to stop you going to a friend’s wedding, for example. Also, as all hotels (excluding small B&Bs) are VAT registered, it would be easy to collect and police.
Are there other alternatives?
As Keir Starmer and Rachel Reeves have committed to freezing rates of income tax, NIC and VAT, they have precious little room for manoeuvre when it comes to raising additional tax revenues. Economic growth would work, but this is rather unpredictable at the moment and is not forecast to get significantly better during the life of this parliament.
So, in the short to medium term. It’s time to think outside the box and consider any option that is unlikely to upset the bulk of our population but raise significant amounts of additional tax.
The Scottish model
North of the border, they already have the ability to charge different rates of income tax and to introduce other Scotland only taxes, EG the tourist tax. So, should Dear Rachel consider this option? Well, take income tax as an example, Scotland has slightly higher tax rates than England, with the extra yield being used to fund free university education and improved social care, which has widespread public support.
Given Dear Rachel’s commitment to freezing VAT, NI and income tax rates, unless she breaks her own self-imposed fiscal straitjacket, perhaps she should consider alternative new taxes, such as the tourist/hotel tax to solve her problem or by tweaking existing taxes, without putting up the rates.
Possible changes to existing taxes
Whilst the Chancellor has promised not to raise the Standard Rate (SR) of VAT from its current level of 20%, she could consider simplifying the tax by reducing the number of exemptions. This could include making children’s clothes SR, except for items clearly designed for babies and also removing the ridiculous rule that cakes are zero rated and biscuits Standard Rated.
These two are just the tip of an unnecessarily complex VAT liability system, the simplification of which would also save staff and unnecessary Tax Tribunal cases, such as the Jaffa Cake saga which went on for years before HMRC eventually conceded, having cost the taxpayers millions.
Dear Rachel could also make minor adjustments to many other existing taxes without the locals being up in arms. This could include the easy option of not going for cheap ‘Brownie Points’ at budget time and allowing the fuel duty escalator to work its’ tax raising magic, by increasing the levy each year, by 1p above inflation or around 3%.This is hardly likely to cause a hue and cry, as the last year it was raised was 2010.
The first step
Before changing any of the existing taxes, the Chancellor could make a start with the easily introduced Hotel tax, which would not have any obvious downside as realistically, it is unlikely that anybody would notice. The average tourist certainly wouldn’t and people booking a one-night stay, for example a wedding, would budget to pay (say) £100 a night and not be fussed how this is made up. If they suddenly discovered that the price had gone up by a fiver, few would be likely to cancel their plans.
The biggest user of hotels, other than tourists is the business sector and they would not be particularly bothered as the entire cost of a night’s stay would be tax deductible. Also, one of the best things about this scheme is that it barely hits most UK consumers. Some of us may choose to take a city break in the UK and will then be liable to the tax, but for the most part those funding it are from overseas.
Accountant’s view
Only time will tell whether the Scottish tourist tax experiment will have any negative impact, but I suspect that it won’t, with the local council able to support and fund its festivals and other services more easily. In England and Wales, some boldness in tax raising is long overdue and it would make far more sense for Reeves to introduce this scheme and still stick to her fiscal rules!
