The Chancellor must dramatically raise taxes to deliver on the government’s promises both to end austerity and cut the deficit, a think tank has said.
Chancellor Philip Hammond would need to announce £19bn in tax hikes – the equivalent of a penny on income tax, National Insurance and VAT – in this month’s budget to keep to pledges already made, the Institute for Fiscal Studies says.
The Conservative manifesto vowed to cut the deficit and Theresa May used a speech at her party conference to tell the public, after eight years of spending cuts, that “austerity is over”.
But the IFS’ annual Green Budget report says there are tough choices facing Hammond on October 29, as it underlines there is “virtually no Brexit dividend” to relieve spending pressure, despite Hammond’s hopes of a boost if a withdrawal deal is agreed.
The Treasury can expect only a “modest” £1bn-a-year saving on EU contributions by 2022/23, a figure which could “easily” be outweighed by additional spending on bureaucracy, such as new border guards, the IFS says.
And, unless there is a massive and unexpected boost to the economy, Hammond will face the choice between “substantial” tax hikes or ditching his target of balancing the books by the mid-2020s, according to experts.
If the Chancellor chooses to fund the end of austerity by raising taxes by 1% of national income, this would bring the overall tax burden close to its highest level since the end of the Second World War – though it would still be in the middle of the range for developed industrial countries.
Even £19bn of tax increases by 2022/23 would be enough only to meet existing commitments on additional funding for health, defence and aid – including the the first three years of the five-year £20bn boost promised to the NHS – while halting real-terms cuts in other areas, said the respected economic think-tank.
And this would still leave social security cuts totalling £7bn to work their way through the system.
Describing this goal as “a minimal definition of the end of austerity”, the IFS warned: “Unless there are substantial tax rises, or much-better-than-expected economic growth, the prime minister’s aim of ‘ending austerity’ is unlikely to be compatible with the Chancellor’s aim of balancing the books by the mid-2020s.”
Alternatively, the Chancellor could stick to his guns on the deficit and leave many public services to struggle under the strain of a decade and more of cuts.
Paul Johnson, the Institute for Fiscal Studies
This leaves Hammond with “the toughest of circles to square” in his autumn Budget and next year’s Spending Review, said IFS director Paul Johnson.
“He has a big choice. He could end austerity, as the prime minister has suggested,” he added.
“But even a limited definition of what that might mean would imply spending £19bn a year more than currently planned by the end of the Parliament.
“An increase of that size is highly unlikely to be compatible with his desire to get the deficit down towards zero.
“Alternatively, the Chancellor could stick to his guns on the deficit and leave many public services to struggle under the strain of a decade and more of cuts.
“He could reconcile these demands by raising taxes, and in principle there are plenty of good options, but the overall tax burden is already high by UK historical standards and he could be constrained by the lack of a parliamentary majority.”
To end austerity, ministers would also have to halt £4bn worth of cuts to day-to-day spending in other departments planned for next year, along with a further £2bn pencilled in for the years to 2022/23.
The IFS set out a series of alternative tax hikes to place the burden on better-off members of the older generation, including:
Ending the practice of writing off Capital Gains Tax on assets in a deceased person’s estate, estimated in 2012 to cost £490m a year.
Abolition of Entrepreneurs Relief, which cost £2.7bn in 2017/18.
Charging employee National Insurance contributions on those over state pension age, raising around £1.1bn.
Reforming the “indefensibly generous” treatment of pension pots bequeathed after death, which are not subject to tax if the holder dies before the age of 75.
Reforming council tax so bills are proportional to the value of a property, with a potential £8bn a year raised if rates on the top four bands were doubled.
Johnson said Hammond’s tax and spend choices for the next spending review period, beginning in 2020, will be “the biggest non-Brexit-related decision this Chancellor will make”.
Shadow Chancellor John McDonnell said the report “heaps yet more pressure on the Chancellor to explain how he is going to deliver on the Tory promise of ending austerity”.
“With billions of cuts in the form of Universal Credit still to come, and public services at breaking point, tinkering around the edges is not enough,” he added.
“It’s time the Chancellor finally came clean about where the additional funding for the NHS is coming from.”