Paying for the Pandemic

O'Donovan, Nicholas ORCID: https://orcid.org/0000-0002-0588-7734 (2020) Paying for the Pandemic. In: Future economies research and policy papers. Working Paper. Manchester Metropolitan University.

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Abstract

Coping with the medical and economic fallout of the coronavirus pandemic has required a massive surge in UK public spending, at a time when tax receipts look set to plummet as a result of the lockdown. This Future Economies Research and Policy Paper examines how policymakers might reconfigure the UK tax system in the wake of the crisis – while recognising that the precise extent to which tax rises are needed will depend upon shifts in the cost of government borrowing, and the evolving relationship between fiscal and monetary policy.  Any discussion of the UK’s fiscal response to the pandemic must start from an appraisal of the pre-pandemic status quo: itself a legacy of the global financial crisis, and the way in which UK policymakers chose to respond to it. Deficit reduction over the last ten years relied overwhelmingly upon spending cuts, suggesting that there is limited scope for further reductions in expenditure in the aftermath of the present crisis.  There are strong grounds for considering a one-off wealth tax to fund some of the fiscal costs of the present crisis. Normatively, it is people who accumulated assets in the pre-crisis period who are enjoying higher levels of government spending on healthcare provision and social insurance than they have historically paid for, justifying a windfall levy on their under-taxed wealth. Practically, future taxpayers may struggle to finance additional spending on more resilient public services if they are simultaneously expected to foot the bill for the present crisis.  Post-crisis, the UK tax system and fiscal framework should be reformed to improve the resilience of households, businesses, and the public sector. This could involve cultivating a more expansive conception of social insurance, encouraging the corporate sector to rely more heavily upon equity finance, and recognising everyday government spending in areas such as healthcare as a vital form of long-term investment in the UK economy.