Scale of tax rises and benefit cuts leaves Coalition seeking unachievable spending cuts warns think tank

22 June 2010

The package of tax rises and benefit cuts in the Emergency Budget today leaves the Government having to find cuts in public spending that are politically infeasible warns the Social Market Foundation.

Ian Mulheirn, Director of the Social Market Foundation, said:

"This budget had to pass two tests- are the tax changes fair and is the deficit reduction plan politically viable?

The tax rises by and large pass the fairness test, with higher earners paying a higher proportion of their income. But while the tax rises seem big, in the context of what is required, they are not. This poses problems for the credibility of the plan.

The tax measures announced today mean cutting over £60 billion from public spending over the next five years. With universal benefits protected, the NHS needlessly ring-fenced and the unaffordable triple lock on pensions, cuts elsewhere will be swingeing which would undo their efforts today to protect the least well off.

The state's creditors want the deficit closed and they don't much care how it's done, so long as the plan is viable. The danger for the Government is that the country simply won't swallow this level of cuts to public services - hair-shirts have never flown off the shelves. It's therefore likely that the Chancellor will be back with more taxes before long."

Editor's Notes

The SMF published a new report on Friday 11 June called Axing and Taxing - How to Cut the Deficit.

The report presents a package of cuts to fill the £74bn permanent deficit in the public finances caused by the recession, by 2015-16, with some 40% tax rises (£27.8bn) and some 60% cuts (£41.8bn) and £5bn from pro-growth policies. (The Chancellor announced today that the Government's tax/cuts split to fill the deficit would be 23% tax rises and 77% cuts.)

The full report can be viewed here: http://www.smf.co.uk/axing-and-taxing-how-to-cut-the-deficit.html

The report argues that progressive cuts mean protecting the least well off rather than protecting popular universal benefits.

The report presents a package of spending cuts and tax rises to fill the £74bn hole in the public finances by 2016, including an end to child tax credits for better-off families, the imposition of VAT on books and newspapers, tightened rules on housing and disability benefits, and charging better off patients for visits to their GP.

Before the election the Conservative Party argued for some £57bn of spending cuts and the Liberal Democrats £51bn

The coalition has committed to ring fence NHS spending as well as Winter Fuel Payments, free travel and TV licenses for pensioners. Before the election the Conservatives also ruled out means testing universal child benefit.

Summary of Report Proposals:

Spending cuts

 

Department

Measure

Saving

Ministry of Justice

Outcome-based commissioning for sub-12 month prisoners

£1bn

Department of Health

GP charging to manage demand

£1.1bn

Department of Health

10% pay cut and five-year freeze for GPs and consultants

£1.3bn by 2016

Department of Health

Abolish Strategic Health Authorities

£1bn

HM Treasury

3 year public sector pay freeze

£7.8bn

Department for Work and Pensions

Housing Benefit reform. Widen Broad Market Rental Areas and lower reference rent proportion

£700m

HM Treasury

Raise all public sector pension contributions by 1%

£1.5bn

 

HM Revenue and Customs

Increase tax credits1st taper rate by 6ppts

£1.9bn

Introduce age-related Child Tax Credit

£1.5bn by 2016

Cut Child Benefit for those not on tax credits

£5.3bn

Taper the family element of tax credits will other tax credits

£0.9bn

Devolved administrations

Freeze grant to Scotland, raise grant to Wales, to bring spending per capita into line with England

£3.5bn

Department for Work and Pensions

Cut Winter Fuel Payments to better-off pensioners, giving the higher rate to pensioners on pension credit. Reform free TV licenses in the same way.

£1.7bn

Department for Work and Pensions

End self-assessment and assess Disability Living Allowance claims in the same way as Employment and Support Allowance. Re-assess all existing working age claimants.

£3bn

Department for Transport

End free bus passes for the over-60s

£1bn

HM revenue and Customs

Halve ISA limits. Reduce stocks ISA limit to £5,000 per year and cash ISA limit to £2,500

£0.5bn

Business, Innovation and Skills

Axe the Train to Gain programme, recycling part of the savings into more effective skills provision

£0.7bn

Business, Innovation and Skills

Raise student loan interest rate to government cost of borrowing for higher-paid graduates

£0.4bn

Ministry of Defence

Reduce frictional procurement costs

£0.8bn

Other recently announced cuts

Child Trust Fund and other efficiencies

£6.2bn

Total

 

£41.8bn

 

Tax rises

Tax

Measure

Revenue

VAT

Up 1.5 pence

£7.5bn

VAT

Remove books, magazines zero-rate

£1.6bn

CGT

Raise CGT to 40% for non-business assets but add indexation relief

£2bn

Income tax

Freeze higher PA for older people

£1bn

Bank liabilities levy

Levy on short term wholesale bank liabilities

£2.7bn

Taxes already in place

Measures already in train – excl. £6bn NICS change

£13bn

Total

 

£27.8bn

 

Promoting growth

 

Productivity

Measure

Tax revenue

Transport infrastructure

Congestion charging plus voucher mutualisation, removing two-thirds of the UK’s £20bn congestion costs

£5bn

Total

 

£5bn

 

The Social Market Foundation is a leading UK think tank, developing innovative ideas across a broad range of economic and social policy. It champions policy ideas which marry markets with social justice and takes a pro-market rather than free-market approach.

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