With the Conservative party winning a majority and George Osborne returning to his position as chancellor of the exchequer, the UK now faces another five years of Tory-led tax-and-spend plans. But without the competing visions of coalition partners, how will this Tory Treasury be different from that of the last government?
When looking for answers, the Conservative manifesto, published three weeks before the General Election, is a good place to start. The austerity-heavy plan called for a reduction in borrowing of 5.2 per cent of the national income over the next five years, which the Tories say would result in a surplus by 2018-19 and a reduction in the debt-to-GDP ratio from 80 to 72 per cent by the end of the parliament.
While vowing to reduce the size of the state, however, the Conservatives wooed voters on the campaign trail with a series of promised tax cuts, including a pledge to increase the personal allowance to £12,500.
The Tories also said they would raise the higher-rate threshold for income tax to £50,000 by the end of the next parliament, and promised to reduce inheritance tax by introducing a new family home allowance.
But it was not all giveaways, as the Tories also pledged to restrict tax relief on pension contributions for those with an annual income above £150,000, and most significantly, vowed to raise at least £5bn of revenues through anti-tax avoidance measures alone.
The independent Institute for Fiscal Studies (IFS), however, said last month that the “extent to which this is achievable is highly uncertain”, and that in the likely event the Tories were unable to generate £5bn from the efforts, voters could expect to be hit with higher taxes.
Throughout the campaign, the Conservatives ruled out a variety of tax hikes, including increasing the main rate of income tax, the VAT or National Insurance contributions.
But IFS director Paul Johnson pointed out that those three revenue sources amounted to about 70 per cent of national income, and by refusing to touch them, the Tories were “boxing themselves in”.
“If you want £5bn quickly, a penny on basic rate of income tax would give you £5bn quickly, probably without doing a vast amount of economic damage,” Johnson said, adding that amending National Insurance contributions or increasing capital gains taxes could also provide the Treasury with quick cash.
Johnson acknowledged that such moves would be politically unpopular for the Tories, but added that he and his colleagues have said for months that at least one post-General Election tax hike was likely, regardless of the shape of the government.
“History tells us that whichever party gets in, they do tend have some tax increases up their sleeve that they haven’t actually revealed to us in their manifestos,” he said.
Johnson pointed to the last government’s VAT rate increase, and New Labour’s hike in National Insurance contributions as examples of such surprise tax hikes, before adding: “I don’t think it’s a great deal different this time.”
Meanwhile, in order to achieve their desired surplus before the end of the parliament, the Tories have also committed to a series of spending cuts, which the IFS estimates would amount to £10bn from welfare benefits and £30bn from government departments -- not including foreign aid, education and the NHS, which the Conservatives have said will not only remain protected, but in some cases receive additional funds. During the campaign, for example, the Tories committed £8bn in additional spending to the NHS.
The promises resonated with voters, but some economists and campaigners remain unconvinced.
Jonathan Isaby, chief executive of the campaign group the TaxPayers’ Alliance (TPA), said MPs must “stay strong” on spending restraint “after a flood of spending commitments during a tight election campaign”.
“As a single party government, they have no excuse for not meeting the task,” he added.
TPA campaign director John O’Connell agreed, but also told City A.M. that the Tories, perhaps ironically, now have an “interesting challenge” in governing as a majority, as opposed to a coalition.
“They promised quite a lot in the campaign,” O’Connell said. “Now they don’t have coalition negotiations where they can quietly drop those promises.”