IFS: coalition could avoid a VAT increase

THE government could bring the deficit under control without raising VAT, according to the Institute of Fiscal Studies (IFS).

But a Lib Dem pledge to lower income tax thresholds coupled with Tory promises to ring-fence spending on health and overseas aid means the coalition will probably have to hike taxes.

Responding to the Office for Budget Responsibility’s forecasts, the IFS said the government would have to achieve a fiscal tightening of £85bn by 2014-15 to meet its previously-stated target of eliminating the bulk of the structural deficit by 2014-15.

Based on the chancellor’s preference for 80 per cent spending cuts and 20 per cent tax rises, that implies £68bn of spending cuts and £17bn of tax rises. Labour’s tax rises are already set to raise £18bn.

However, any new tax cuts – such as the reversal of a rise in employer National Insurance Contributions, tax breaks for the married and an increase in personal income tax allowances – would have to be financed through higher taxes to fit the 80:20 ratio, the IFS said.

If the coalition wants to finance these tax cuts without raising taxes or cutting welfare benefits, it would have to cut departmental budgets by 20.3 per cent or £78bn by 2014-15.

But because it has agreed to yearly increases in NHS spending and more cash for international aid, it would actually need to cut other departmental budgets by a massive 32.7 per cent or £82bn, a number the IFS thinks could be “prohibitively large”.

Alternatively, it could stick to Darling’s £44bn of spending cuts and slash all welfare payments by 18 per cent, saving £30bn. Again, the IFS says cuts of this magnitude would be too much for the public to stomach.

That means, in the opinion of the IFS, the government will have to cut departmental budgets and welfare payments, but also hike taxes – or adopt a less ambitious deficit reduction target.