The Social Market Foundation, a leading UK think-tank, has today provided a first response to the Government’s call for ideas to fix the debt crisis in a new report, Axing and Taxing: How to cut the deficit, which concludes that the budget deficit cannot be fixed without substantial tax rises, cuts to the NHS budget and an end to universal benefits. The new analysis shows that Government will be hard-pressed to present a convincing and fair plan to cut the deficit without abandoning pledges to protect popular policies like Child Benefit and the Winter Fuel Payments and free transport for pensioners.
The report presents a package of spending cuts and tax rises to fill the £69bn hole in the public finances, 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.
The report argues that progressive cuts mean protecting the least well off rather than protecting popular universal benefits. And taxes will have to rise to avoid ‘salami slicing’ of public services – where all budgets are reduced without regard to value – that would lead to worse outcomes for everyone.
The SMF recommends that investment in skills, education and infrastructure should be maintained to foster social mobility and economic growth, but that substantial welfare payments to people on medium to high incomes should be scaled back. Decisions on the deficit should focus on enduring the necessary pain now not storing up problems by failing to invest in the skills of the future work force.
Commenting on the report SMF Director Ian Mulheirn said:
“The cuts needed are eye-watering including ending the Winter Fuel Payment for wealthier pensioners, halving the ISA allowance and stopping Child Benefit payments to people on medium to high incomes. It’s clear that there is no choice but to end the provision of universal benefits if the poor are not to be hit disproportionately hard by the cuts to come. If it is serious about cutting the deficit the Government will have to axe some popular programmes it currently plans to protect.”
Mr Mulheirn continued:
“In addition tax will have to go up by much more than any party has so far indicated – by another £12bn. Our proposal suggests that around 60% of savings should come from spending cuts and 40% from tax rises.”
Editors Notes
- The SMF report presents a package of cuts to fill the Treasury’s estimated £69bn permanent deficit in the public finances by 2015-16, with £39.1bn from spending cuts, £25.3bn in tax rises and £5bn from pro-growth policies.
- 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.
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 |
| 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 | £2bn |
| Introduce age-related Child Tax Credit | £1.5bn by 2015-16 | |
| 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 | £1.3bn |
| 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 |
| 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 |
| Ministry of Defence | Reduce frictional procurement costs | £0.8bn |
| Other recently announced cuts | Child Trust Fund and other efficiencies | £6.2bn |
| Total | £39.1bn |
Tax rises
| Tax | Measure | Revenue |
| VAT | Up 1p | £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 | £2.7bn | |
| Taxes already in place | Measures already in train – excl. £6bn NICS change | £13bn |
| Total | £25.3bn |
Promoting growth
| Productivity | Measure | Tax revenue |
| Transport infrastructure | Road pricing 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.
