TREASURY forecasting does not take into account the fact that lower taxes mean people work harder and have more money to spend, although that could be set to change following proposals made by the chancellor yesterday.
George Osborne told the Treasury Select Committee yesterday his department will consider using so-called “dynamic scoring” in a bid to work out the indirect impact of various tax rates.
Independent analysts praised the government’s efforts to improve tax estimates, but warned the process was an uncertain and difficult one.
“The coalition started analysing some types of behavioural response in its emergency Budget in June 2010, which was a very big improvement on the previous analysis,” said Stuart Adam from the Institute for Fiscal Studies (IFS).
The previous government hugely overestimated the amount of money the 50p top rate of tax would raise, initially hoping for £2.5bn – but the actual figure turned out to be under £1bn.
On top of that, the predicted figure did not take into account the £130m lost through reduced spending and so reduced VAT receipts.
Back in 2009 when the 50p tax’s mistaken estimates were published the IFS warned it was “formidably difficult” to take full account of all the changes.
Osborne was mocked by Labour MP John Mann, meanwhile, after admitting: “I cannot remember the last time I bought a pasty at Greggs.” Osborne has been attacked for looking to apply VAT to takeaway food if it is heated up, such as pasties.