More Ambition Needed To Repair UK Public Finances, Study Suggests

by Robert Lee, Tax-News.com, London

05 February 2010

Whoever forms the government after the forthcoming general election in the UK should put in place a fiscal tightening more ambitious over the next Parliament than that set out in last month's pre-budget report (PBR), but without putting the recovery at undue risk with significant extra tax increases or public spending cuts in the coming year, researchers from the Institute for Fiscal Studies have argued.

"The need to reassure investors that the public finances will be repaired promptly and the possibility that the structural damage to the public finances from the financial crisis may be greater than the Treasury anticipates all suggest that it would be sensible to be somewhat more ambitious," the IFS stated in its Green Budget, produced in collaboration with Barclays Capital.

The authors suggest that the government should aim for a total tightening of around 5% of national income or GBP70bn (USD111bn) over the five years to 2015–16. This almost 1% more than the combined spending cuts and tax increases announced by the government since the 2008 pre-budget report, and, according to the IFS, would imply the need to identify another GBP13bn of tax increases or spending cuts by 2015–16 on top of those necessary to achieve the plans in the last PBR.

Significant revenue could be raised, the Green Budget posits, by increasing rates of income tax, National Insurance (NI) and value-added tax (VAT), each of which would weaken work incentives and, on average, hit the rich harder than the poor. But significant revenue could also be raised from tax reforms that would also make the system more efficient, such as extending the full rate of VAT to more goods, charging NI on employers' pension contributions, charging more NI on the self-employed, increasing the small companies rate of corporation tax, a new carbon tax and taxing capital gains more heavily, the researches suggest.

However, given the tentative nature of Britain's economic recovery, the Institute cautions against significant further tax increases and spending cuts during 2010–11.

"The fiscal tightening set out in the PBR is already front-loaded and – notwithstanding ministerial claims – the UK is withdrawing its temporary fiscal support for the economy earlier than almost all other G20 countries," the IFS noted.

So, Mr Darling (or Mr Osborne, depending on who is in the Treasury hot seat following the election), it seems you're damned if you do, and you're damned if you don't.

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