Belfast Telegraph

Wednesday 30 July 2014

Think-tank tips post-poll tax hikes

Chancellor of the Exchequer George Osborne gets ready to deliver his annual Budget statement
The Chancellor had some good news for taxpayers in his Budget statement

Tax rises totalling as much as £12.5 billion - the equivalent of almost 3p on the basic rate of income tax - could be in the offing after the 2015 general election as a result of decisions in Wednesday's Budget, a respected economic think-tank has suggested.

Chancellor George Osborne has set a course for "severe" cuts to public spending in the years 2015-18, and it is now "more likely than not" that post-election tax rises will be used to take some of the pressure off Whitehall departments, said the Institute for Fiscal Studies. But the Treasury insisted that there would be "no need for higher taxes", as its plans rely on cutting back public spending as a proportion of national income.

Current government policy implies reductions in day-to-day spending on public services of £23 billion between 2015/16 and 2017/18, a cut of 7.6% which would leave budgets 18.4% below 2010 levels, after taking inflation into account, said the IFS. Departmental spending would be below 2003 levels in real terms and below 1998 levels as a share of national income.

But health, schools and aid are shielded from cuts at least until 2015/16, and if this is extended to 2017/18, unprotected areas like defence, law and order and transport would face cuts of 14.5% in the three-year period, according to IFS calculations.

Just to keep annual reductions in spending to the same rate seen since 2010 would require the Government to find £9 billion from other sources, such as tax rises or cuts to welfare or pensions. And departments will have to find another £3.5 billion to cover additional National Insurance payments for public sector workers as a result of the decision to bring forward the introduction of single-tier pensions to 2016.

IFS director Paul Johnson made clear he expects at least some of this £12.5 billion to be covered by tax rises. A passage in the Budget documents noting that "it would, of course, be possible to do more of this further consolidation through tax" indicates that the Treasury has considered the option of post-election tax hikes, he said.

Mr Johnson said the comment betrayed "a degree of scepticism" within the Treasury over the prospect of achieving the desired savings by spending cuts alone. Without help from any other source, "the outlook for unprotected spending looks grim indeed", he said.

"If I was betting, I would not be betting that all of the current planned fiscal consolidation post-2015 will happen through departmental spending," said Mr Johnson. His best guess was that the Government will use a combination of tax hikes, borrowing and cuts in "annual managed expenditure" - mostly made up of welfare and pensions - to take some of the pain off public services. And he added: "Post-election budgets tend to raise a lot of tax."

The most straightforward way to find some of the money would be a penny on the basic rate of income tax, but this would be politically explosive and no Chancellor has dared do it since 1975, he pointed out.

But a Treasury aide said: "Our plans are very deliberately based on cutting spending rather than raising taxes. By the end of the period, public spending is forecast to fall to 40.5% of GDP, close to its historical average, so there is no need for higher taxes."

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