UK Chancellor Needs To Find Another UKP9bn

by Jason Gorringe, Tax-News.com, London

31 January 2002

Presenting its shadow green budget yesterday, three months ahead of the real thing, the UK's Institute of Fiscal Studies said that Britain's public finances are headed for a gap of up to UKP9bn that may result in higher taxes. But the institute also says that the chancellor will find it increasingly difficult to close the gap through tax changes.

The UKP9bn would be needed to keep public non-investment spending growing until 2005-06 at the annual 3% rate projected for April 1999 to March 2004; and limiting the increase in spending to 2.5% a year would require UKP5bn extra in tax.

The institute adds that Labour's pledge to rule out increases in income tax rates "might seem disadvantageous should the government want to raise significant revenue". The institute says: "The pledge limits the potential to increase the single biggest tax, and it does so more severly now than it did in Labour's first term, as many of the means used to increase income tax revenue without changing the rates are now exhausted."

Abolishing the UKP30,000 ceiling for National Insurance payments would raise UKP5.9bn, but might also be controversial, by increasing the top marginal tax rate to 50% from 40%. Another possibility would be to increase the 17.5% rate of VAT; the Government has already ruled out extending VAT to exempt items such as newspapers and public transport, but an increase in the rate to 20% would raise UKP9bn a year.

That seems easy, but IFS economist Tom Clarke says the main problem for Labour was that an increase in VAT would be "slightly regressive" - the poorest in society would lose a greater share of their weekly income than the richest. "Implementing this in isolation would represent something of a break with the redistributive direction of reforms introduced in Labour's first term of office," he said.

Recommended