‘Substantial’ tax rises are needed if the government is serious about putting an end to austerity while balancing the books, which the Institute of Fiscal Studies (IFS) calculates will cost £19 billion.
A 'minimal definition' of the 'end to austerity', as promised by prime minister Theresa May, will cost £19 billion a year by 2022/23, according to figures from the IFS in its ‘green Budget’. However, this aim is incompatible with chancellor Philip Hammond’s plan to balance the books and reduce the deficit by the mid-2020, unless the government can find billions of pounds of new money.
The UK’s borrowing has fallen dramatically since its peak in 2009/10, and will be at its lowest as a share of income since 2001/02. However, the £40 billion deficit still poses a problem, especially as May (pictured below) has promised billions of pounds for the NHS.
The IFS said that the Budget delivered by Hammond in two weeks’ time may reveal that borrowing this year is around £5 billion lower than the £37 billion forecast by the Office of Budget Responsibility in the spring, and by 2022/23 it may be £6 billion lower than the £21 billion forecast.
Despite that, in order to reduce the deficit and increase spending in key areas the government will have to find ways of increasing revenue.
Christian Schulz, chief UK economist at Citigroup and contributor to the green Budget, said economic growth could help the UK somewhat, as he believes gross domestic product (GDP) growth could hit 1.9% in 2020, above the 1.3% consensus expectation, thanks to a ‘Brexit bounce’.
He believes the transition out of the EU will be a ‘smooth but an ultimately hard Brexit’.
Without a plan in place, he said the transition could be ‘very very long’ which could help reduce short-term uncertainty. If it is a short transition then ‘we need to know what comes after the transition, which could reduce the uncertainty’.
‘If we get a nice Brexit then we will get a bounce in GDP growth,’ he said. ‘As long as there is uncertainty about the deal then growth will be weak but when there is a deal it could go up.’
The political uncertainty coupled with a need to simultaneously reduce the deficit and end austerity means the Budget will be ‘very challenging’, said IFS deputy director Carl Emmerson.
The government has already delivered a number of deep budget cuts, including £7 billion of working age benefit cuts that are still working through the system, outside of protected departments like health, defence and international development.
He said finding £19 billion of savings needed to fulfil promises around NHS funding and aid spending was ‘very difficult’ as unprotected departments had already had ‘their budgets cut very deeply’ and there are already ‘signs of strain in many local authorities and the justice department’.
While the roll-out of universal credit and cutting of child benefit will present some savings, it will not be enough and Hammond could use the Budget on 29 October to bring in a number of tax rises.
Emmerson (pictured) said 60% of tax revenues comes from income and national insurance contributions (NICs) so this is ‘a natural place to look and increase the rates of these taxes’.
However, this jars with the Conservative pledge to increase the personal allowance to £12,000 and the higher rate allowance to £50,000 by April 2020, up from the current levels of £11,850 and £46,350, respectively. This plan will cost an extra £1 billion a year.
One area that Emmerson believes could be tackled by Hammond is NICs on pension income, or the lack of them.
Emmerson said bringing in NICs for pension income could help fund the NHS.
He said ‘older people will disproportionately benefit [from funding the NHS more]’ but they also pay less towards it as they are exempt from NICs on their pensions. ‘NICs on pension income would be £1.6 billion a year.’
Emmerson also said death taxes were 'more generous than they should be', specifically the inheritance tax exemption for pension pots that allows them to be passed on tax free.
He said this encouraged people to ‘draw down on non-pension assets [to fund retirement] and save as much of their money in a pension’.
‘We are encouraging people to leave money in their pension rather than use it to pay for retirement,’ he said.
Although he said scrapping the inheritance tax exemption for pensions would not save money now, it will stop people using pensions as inheritance tax planning tools.
‘We should tackle that now before it becomes a problem,’ he said.
He added that the fact capital gains tax was escaped on death encouraged people to ‘hold on to assets rather than selling them’ and getting rid of the exemption would raise £500 million a year.
‘Tax better off people more,’ said Emmerson. ‘Entrepreneur’s relief costs the government £2.7 billion a year and is a tax cut for the rich – 70% of gains are going to just 6,000 a year with the average relief worth £300,000. It is too generous and should be cut.’
In the spirit of taxing the better off more, Emmerson said doubling the council tax rates on properties in the more expensive E to H bands, would raise £8.5 billion a year.
Targeting businesses would boosted the coffers and Emmerson said the government could backtrack on its plan to lower corporation tax, which will be cut from 19% to 17% in April 2020 at a cost of £5 billion to the government.
‘It could cancel that but politically it would be difficult and a breach of its manifesto, and would require a vote in parliament,’ he said.
‘The minimum definition of ending austerity would cost £19 billion by 2022/23… if they want to do this and eliminate deficit the we are looking at substantial tax rises.’