Wednesday, 28 April 2010

A wake up call

The Institute for Fiscal Studies provided a wake up call in the general election campaign yesterday. It attracted considerable media attention when it pointed out just how big the task of tackling the deficit was. Hopefully the party leaders will be pressed on this issue in Thursday's televised debate on the economy.

None of the parties will say very much about VAT but it is generally recognised that it will have to be increased to at least 18.5 per cent after the election (any further increase would have to take into account the effect on inflation). There is no scope for further increases in income tax and the use of national insurance is politically contested.

As far as expenditure cuts are concerned, both parties talk about efficiency savings, but it is by no means clear that these can be achieved, certainly in the timescale required. Labour's list of cutbacks does not add up to a fraction of what is required. Gordon Brown has been attacking the Conservatives and Lib Dems for proposing withdrawing tax credits from better off families, but unless one takes measures of this kind one isn't going to get started.

David Cameron points to the plan to increase the retirement age for men to 66 by 2016 but this will have no impact in the required timescale. It is the kind of drastic measure that would have an immediate effect because it would reduce expenditure and also make those between 65 and 66 continue to pay national insurance. It's politically explosive, of course, but the whole benefits area cannot be left alone as it would bring big savings very quickly. There would be a case for freezing all benefits except the state pension.

Read more about what the IFS has to say here: The Big Hole


Rich Green said...

Out of curiosity, what is your rationale for saying there is no scope for further rises in income tax? The only rise so far has been the introduction of the 50p rate, which doesn't affect most voters at all. And the basic rate has been cut several times over the last few years. Do you just mean there's no political space for a rise? And if so, what makes a rise in income tax any less possible than any of the other options we're all too terrified to contemplate at the moment?

Wyn Grant said...

First the parties have pledged not to increase the rate of income tax (they can tamper with the allowances, but the Lib Dems want to increase them). Admittedly that did not stop Labour introducing a 50 per cent rate but that could be passed off as an emergency measure and it is not an issue in the campaign. Second, ever since the Thatcher era it has been perceived that increasing the standard rate is a big turn off for voters. Whether this is the case or it is something of a myth is less certain. It would certainly be less regressive than increasing VAT. Personally I would be inclined to increase the standard rate while the deficit is being paid off, but I am not answerable to the electorate. And would one have to take account of the impact on consumption and hence the economy as a whole.