Osborne has scope to make £20bn tax cuts: think tank
Chancellor George Osborne has scope for temporary tax cuts of up to £20bn in his March Budget to boost growth, a respected economic think tank has said.
The Institute for Fiscal Studies (IFS) said that the case for cuts to VAT or employers' National Insurance contributions, as well as increased investment, was “stronger now than a year ago”.
Expectations of a fall in inflation later this year meant that the Government could increase borrowing by around 1% of GDP to fund a short-term fiscal stimulus without triggering an increase in interest rates, said the IFS.
But the think tank warned that any stimulus package must be “timely, targeted and temporary”. There was a “strong case” against permanent tax cuts at this stage, and any larger package would risk unsettling the bond markets and forcing up the cost of Government borrowing.
Labour — which has been calling for a five-point plan to boost jobs and growth, including cuts in National Insurance contributions and VAT, as well as infrastructure investment — welcomed the IFS judgment, contained in its Green Budget.
Shadow chief secretary to the Treasury, Rachel Reeves, said: “The independent IFS is right to say that the case for short-term action on jobs and growth — for example through the temporary tax cuts Labour has been calling for — is now stronger and will get stronger still if the eurozone crisis deepens.
“But rather than waiting for things to get even worse, George Osborne should take urgent action in next month's Budget. Years of slow growth and high unemployment are not just bad for families and for the deficit, but also risk permanent damage to our economy.”
The report predicted that Mr Osborne will beat his deficit reduction target by £3bn — largely due to Whitehall departments underspending on their budgets.
But it said prospects for 2012 remain bleak, with predicted growth of just 0.3% — significantly lower than the government forecast of 0.7%.