The United Kingdom’s Dilemma

In late June 2010, the coalition government of Prime Minister David Cameron released its emergency Budget. One item that caught my eye in this time of HST implementation was the change to the UK’s Value Added Tax (VAT). On January 4th, 2011, the tax will increase from its current level of 17.5% to 20%.  What was particularly interesting was that this increase is expected to raise approximately £111 billion in a full year by 2015 – 2016, according to the Office of Budget Responsibility, compared to £80.7 in 2010 – 2011. As well the United Kingdom VAT rate still falls well short of the maximum of 25% allowed under European Union law and was amongst the lowest in the western EU save Spain prior to the proposed increase.  A few items that are considered necessities still remain tax free including food, children’s clothing and books while domestic fuel is only taxed at 5 percent.  Total tax receipts from all sources are expected to rise from £514.6 billion to £737 billion in the same time period.  
The United Kingdom has reached the point of budgetary desperation. As it stands now, the United Kingdom is considered by many economists to be the most indebted nation in the world. Their national debt stands at nearly £924 billion. Their public sector net debt (as shown in the chart below) is projected to reach 70.3% of GDP by 2013 – 2014.

By comparison, the United States debt to GDP ratio is 88.9% and Canada’s is in the neighbourhood of 35% depending on the source used.  The United Kingdom’s debt to GDP fell  at number 22 in the world in 2009.  The United Kingdom’s budget deficit is projected to be £148 billion for fiscal 2010 – 2011 (in excess of 5 percent of GDP); it is hoped that the increased taxes (except corporate taxes which will drop from 28 to 24 percent over four years) and reducing spending in this year’s budget will help balance the budget by fiscal 2014 – 2015. In the budget, the government anticipates expenditures of £44 billion on debt interest alone in 2010 – 2011; this is projected to rise to £67 billion by 2014 – 2015. The UK had been threatened with cuts to their credit rating by two rating agencies unless the new coalition government made major changes to their tax and spend philosophy; the UK had not balanced their budget since 2002 – 2003 and their debt growth far exceeded their economic growth.
If the United Kingdom feels that it is prudent to at least partially balance their budget deficit using an increase in their VAT, I suspect that they will be setting the trend for other jurisdictions around the world.  Once again, tax payers will be forced to fund the spend and tax philosophy that has become the habit of those we elect.

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