Brown Needs To Raise Taxes By GBP2.5 Billion, Says IFS

by Robin Pilgrim, LawAndTax-News.com, London

31 January 2006

In its 'Green Budget', published last week, the UK's Institute for Fiscal Studies predicted that Chancellor Gordon Brown will need to increase taxes by GBP2.5 billion in order to bring the country's finances back into line.

This represents a significant drop from the amount predicted in the Institute's 2005 Green Budget, in which it stated that:

"It is impossible be sure whether tax-raising measures will be needed to meet the fiscal rules over the next economic cycle, as we do not know how long that cycle will be. But to put the public finances back on a path as strong as the Treasury aimed for in the 2004 Budget would require a tax increase of at least £11 billion."

Writing with regard to the Chancellor's 'Golden Rule' of borrowing only to invest over the course of an economic cycle, the IFS observed that:

"The Treasury has promised to meet the golden rule on average over the economic cycle. In the Pre-Budget Report (PBR), it ‘re-dated’ the economic cycle from the seven years starting in 1999–2000 to the 12 years starting in 1997–98. If the Treasury’s forecasts are correct, then this makes the rule easier to meet in this cycle and the next."

However, it added that:

"Re-dating the cycle at such a convenient time risks undermining the credibility of the fiscal framework. The golden rule should be made more forward-looking and less reliant on a precisely dated economic cycle. If still required, the task of estimating the output gap could be handed to an independent body."

The Green Budget went on to state:

"In the Pre-Budget Report, the Chancellor announced a GBP3 billion tax increase and pencilled in a cut in public spending as a share of national income worth GBP8½ billion a year in today’s terms by the end of the 2007 Comprehensive Spending Review period. We see a reasonable case for a further GBP2½ billion tax increase. More would be needed if the Chancellor decides to cut spending less aggressively."

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