IFS Warns Brown May Have To Resort To Tax Hikes To Cover Revenue Shortfall

by Jason Gorringe, Tax-News.com, London

30 January 2004

Chancellor Gordon Brown has received another warning over the state of the nation’s finances, this time from the Institute of Fiscal Studies, which estimates that income tax may have to rise by as much as 4p in the pound to plug the gap between spending and revenue.

Analysing the public finances in its ‘Green Budget’ preview of the Chancellor’s spring statement, the IFS warns that falling tax receipts and higher-than-forecast borrowing will jeopardise the chances of Brown meeting his own ‘Golden Rule’ of matching day-to-day spending with revenues over an economic cycle.

Consequently, the Chancellor may be forced to raise additional revenues through some form of tax increase in the years ahead, said the IFS.

The Institute, however, believes that the Chancellor’s predictions for the coming year will be met and notes that presently, there is “no crisis in the public finances”. Nevertheless, the report foresees Brown’s forecasts falling short from 2004/2005, and by 2006/2007 an extra £11 billion may have to be borrowed.

In order to meet the Golden Rule in the next economic cycle from 2006, the IFS calculates that the Chancellor will need to "announce measures to raise an extra £10 billion”. It adds that with Brown’s traditional in-built safety margin, an extra £13 billion will need to be found by the Treasury, the equivalent of 4p on the rate of income tax.

Still, given that one of the Labour government’s election pledges was not to raise income tax, the IFS thinks that Brown will turn to national insurance contributions to find the extra revenue.

“The simplest way to raise money would be to increase income tax or NI rates. The government has pledged not to increase the basic or higher rates of income tax during this Parliament, so higher NI rates look the more likely of the two,” observed the report.

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