Tax Increases Will Burden Generations To Come


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The world?s worst financial crisis in living memory created a roll-on effect that will test governments for years to come as they struggle to pay back the huge debts they owe. It is not only gover

The world?s worst financial crisis in living memory created a roll-on effect that will test governments for years to come as they struggle to pay back the huge debts they owe. It is not only governments that will be tried because the fact is that at the end of the day it is the taxpayer who will have to bear the brunt of the failings and foot much of the bill for financial stability.

Fiscal deficits are massive. Spain?s budget deficit was 11.4% of gross domestic product (GDP) last year and is forecast to be 9.8% in 2010. The EU?s target is 3%. Spain?s Stability Program for 2009-2013 forecasts that Spain's ratio of total public debt to GDP will reach 74.3% in 2012 and could be as large as 77.7% by that date if interest rates rise by more than one percentage point. Last year Spain?s debt-to-GDP ratio was 55.2%, compared with a median of 78.2% for the EU as a whole.

In the UK, the national debt totalled ?848.5 billion at the end of January, the equivalent of 59.9% of GDP, and tax receipts were down 16% compared with the previous January. Borrowing hit ?122.4 billion and some economists feel that the Treasury will exceed the forecast that borrowing would be ?178 billion for the 2009 financial year to more than ?180 billion, making the deficit even greater than that in Greece.

Portugal?s budget deficit reached 9.3% of GDP last year and the government estimated that the public debt will rise to 85.4% of GDP in 2010, up from 76.6% in 2009.

In France the deficit was 7.9% in 2009 which is forecast to rise to 8.2% in 2010. The government expects to limit the budget deficit for 2010 to ?149.2 billion.

Couple all that with the looming problem governments face of how to finance the healthcare, social and pension costs of their ageing populations and you will easily come to the conclusion that somehow or other, whether it will be increases in the number of taxes or the amount you have to pay, taxpayers in the future will have to dig deeper into their pockets to keep the taxman happy.

Taxes have already begun to rise in various countries and many have not increased the level of their personal allowances for 2010 ? a stealth tax by another name. The UK has slapped a 50% tax on its higher earners with a loss of personal allowances as well as a cut in tax relief on pension savings.

Spain increased its tax on savings income and France has widened the scope for social charges, another form of tax. Treasuries are also devising new taxes, for instance, the introduction of green taxes to pay for the environment and Romania is thinking of a ?fat? tax on obesity!

The UK is discussing an extra ?inheritance? tax to pay for the healthcare of the older generation which has been described as a demographic time-bomb threatening many countries. Dubbed a ?death tax? by the opposition party, under discussion is a possible ?20,000 levy or a percentage tax either on retirement or on death.

In mid 2009 the population of Britain was estimated at just over 61.4 million; Spain?s was around 46.6 million, Portugal?s 10.7 million and France?s 64 million. In fifty years, it is forecast that the UK?s population will reach 76.7 million; Spain?s 51.9 million, Portugal?s 11.2 million, France?s 71.8 million.

The EU27 population is projected to grow older, with the share of the population aged 65 years and over rising from 17.1% in 2008 to 30% in 2060, and those aged 80 and over rising from 4.4% to 12.1% over the same period. Those aged 65 and over will represent 30% of the population of the EU27 in 2060.

The old age dependency ratio in the EU27, i.e. the population aged 65 years and older divided by the working age population contributing to the fiscal system to provide for pensions and social care for the older generation, is projected to increase from 25% in 2008 to 53% in 2060. This equates to only two people of working age for every person aged 65 or more in 2060, compared with a ratio of four to one today.

To help combat the problem of pensions, Spain wants to increase its retirement age from 65 to 67 to be introduced gradually from 2013. Germany and Demark have also decided to raise the retirement age to 67. The UK has already put in place an increase it its state pension age rising from 60 to 65 between 2010 and 2020 for women born on or after 6th April 1950 and for men and women, the state pension age will increase from 65 to 68 between 2024 and 2046.

The situation has been made worse by the generation of baby boomers – those born 1945 and 1965 – as they begin to retire and live longer than their ancestors; followed by lower fertility rates resulting in a reduction in the number of people of working age paying for their care.

Governments will have to provide health and social care far exceeding that of today and with less people contributing to the economic resources ways will have to be devised to raise more funds. There?s no getting around it. There will have to be spending cuts? and there will also have to be an increase in tax revenue.

If you haven?t already done so you can plan ahead and arrange your wealth so that you pay the least amount of tax possible no matter in which country you live. This will leave you more to enjoy your own old age and a larger pot to pass onto your heirs. Consult a wealth management expert like Blevins Franks to advise you on the appropriate tax saving arrangement for you.

By Bill Blevins, Managing Director, Blevins Franks

4th March 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.