UK in line for fresh tax hit following 2015 election

 
Ben Southwood
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CHANCELLOR George Osborne may be forced to hit UK citizens with yet another swathe of taxes after the next election, in order to fill the hole in the country’s finances.

Current budget plans imply total real term cuts of 33.2 per cent in unprotected departmental spending between the 2010-11 and 2017-18 fiscal years, the Institute for Fiscal Studies (IFS) pointed out in its green budget yesterday.

But since such a level of cuts could be extremely politically difficult, the government may choose instead to cut into unprotected departments, welfare for the elderly, drop its fiscal targets, or hike taxes.

And typically new governments have hit the populace with about £7.5bn of taxes after being voted in, the IFS claimed, giving the incoming government in 2015 a potentially tempting precedent.

The IFS report also looked into the taxation of higher earners, after the coalition have called on those with the broadest shoulders to bear the biggest burden.

The top 20 per cent of households by income paid around half of all taxes, with the top 50 per cent paying close to four fifths. And looking at net taxes – taxes minus benefits – the size of the burden on higher earners is even clearer. The top 10 per cent pay nearly three fifths of net taxes, while the top 20 per cent pay over four fifths.

The top 30 per cent effectively pay for all the benefits – both cash and in kind – afforded to their other seven deciles, the IFS said.

But if the government did want to claw in yet more funds from the wealthier members of society, the IFS said, it would be wise to step away from stamp duty land tax, which the think tank described as a “bad tax”, because it taxes transactions, impeding economic efficiency. A better option would be to update council tax through a complete program of revaluation – as the current system is based on 22-year-old house prices.

The IFS said property taxes were much more difficult to avoid, and had significantly less harmful distortionary effects on economic activity.

But a mansion tax, such as that proposed by the Liberal Democrats would not bring in much revenue, the think tank said, as it would focus on a tiny minority of properties in the top band of council tax.

THE IFS GREEN BUDGET

■ The Institute for Fiscal Studies (IFS) has dug into the figures and found that since the 2010 spending review, government borrowing has worsened by £65bn above forecast – but it has made only £1bn of adjustment to counter this worsening.

■ The cyclically-adjusted current budget deficit, which underpins chancellor George Osborne’s fiscal mandate, is based on the Office for Budget Responsibility’s (OBR) estimate of the output gap – how much spare capacity there is in the UK economy. But output gap estimates vary from 0.8 per cent of GDP to six per cent of GDP – if the OBR estimate were wrong, the government would need either drastically more or less consolidation. There is huge uncertainty.

■ The deficit is going up, not down. Like-for-like borrowing – with one-off changes stripped out – is set to rise £4bn in 2012-13, compared to 2011-12, the IFS say.

■ Unprotected sectors will face cuts totalling almost a third over the whole planned austerity period (2010-11 to 2017-18), if the government adds in no more tax hikes, and refuses to cut into welfare spending on the elderly, or the NHS, education or foreign investment spending.

■ Whatever promises they make, governments tend to hit their subjects with tax hikes worth around £7.5bn in the year after they are elected.

■ Public sector workers of the same age and with the same level of experience and education as those in the private sector are currently paid two to eight per cent more.

■ If the Eurozone breaks up, government debt could rocket above 100 per cent of GDP very quickly, from only around 40 per cent before the crisis.

■ The top 20 per cent of earners already pay around 80 per cent of net tax.