IMF Cautions Brown Against Tax Hikes

by Jason Gorringe, Tax-News.com, London

11 March 2002

In its annual report on the state of the British economy, the International Monetary Fund (IMF) warned Chancellor Gordon Brown against 'excessive' public spending, and urged him to extend VAT to food and introduce charges for public services rather than increase personal income tax rates.

The IMF report warned that 'the recent revenue shortfall experienced may not prove as temporary as expected,' and suggested that any increases in public spending should be funded by the elimination of certain tax exemptions, rather than by further Government borrowing. It also cautioned that:

'Given the rapid increase in outlays over the coming years that existing plans already encompass, directors stressed that any additional spending should be undertaken only if it is based on a clear-cut economic justification'.

The Fund defended the controversial proposal to extend VAT charges to food products by arguing that the poor, who benefit more than any other group from the current exemption, could be compensated by larger tax credits. 'While the poor may benefit proportionately more from the zero rating, the latter also provides an unintended subsidy to the rich,' it explained.

However, according to reports, the Treasury has rejected the suggestion, saying that the Government is bound by a manifesto promise not to change the VAT rating on food.

Meanwhile, the Chancellor has sown the seeds for further discord with the unions in the United Kingdom by promising tax cuts for the business sector in his April budget.

'I am committed to further reducing the corporate tax burden on small business, and in my pre-Budget consultation I am examining measures to achieve this,' Gordon Brown wrote in the Times last week. However the move is likely to anger union representatives, who are already up in arms about the Government's plans to ditch pledges to improve workers' rights, and are likely to feel that the money could be better spent elsewhere.

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