The Government wants taxation to contribute just a 1/5 to deficit reduction. A range of think tanks and The Economist are advising them to focus more on taxes.
A range of progressive think tanks and even the Economist magazine are advising the Government to reduce the deficit with a greater focus on tax rises – George Osborne has said he wants to rely on taxes for a fifth of the consolidation. But as the picture below from the Economist shows, most of the largest fiscal consolidations have seen a more balanced ratio.
“If the government wants to be progressive, it should give a greater role to higher taxes … Which taxes go up – whether now or at a later date, also matters. Increasing the standard rate of VAT is not the act of a progressive government…
“A better option – one that shares the burden of deficit reduction around a large proportion of the population but in a progressive way – would be to increase the basic and higher rates of income tax, something that has not been done in the UK since the mid-1970s. A 3p increase in the basic and higher rates of income tax would raise £15 billion – around one-fifth of the amount needed to eliminate the structural deficit”
Echoing these arguments, Matthew Whittaker of the Resolution Foundation writes, “the deficit reduction plan must exhaust every single potential progressive taxation measure before turning to spending”. He goes on to call for a wealth tax.
Meanwhile, in the Guardian yesterday, Labour leadership candidate David Miliband writes:
“If the Tories stick to their proposed formula of £4 of cuts for every £1 of tax rises this will see departmental spending slashed by a third outside of the NHS and international development. The balance should be 2:1.”
The Tories approach is also challenged by the Demos think tank who also call for a 2:1 rather than 4:1 ratio. They urge the Government to introduce £11 billion of tax rises above and beyond Labour’s plans which included the introduction of a 50p rate and increase National Insurance Contributions. Demos propose aligning all capital gains rates with income tax rates and charging CGT on primary residences when sold; raising the basic rate of income tax by 1p; moving from per-passenger air duty to per-plane air duty; and introducing a carbon tax. Even the Economist believes that the Conservative’s plans are too focused on spending cuts:
Unwelcome though it is, a contribution from higher taxes is required. Just how big it should be is a matter of dispute. The Tories have said they want to rely on taxes for a fifth of the consolidation. That may be too ambitious. If something like 2% of GDP were found by higher taxes, leaving spending to be cut by 5% of GDP, it would still be a tougher mix than all but two of the ten biggest OECD deficit-cutters managed.
The outlier in this debate remain the right-wing think tank, Reform, who this week called for over 90 per cent of the deficit reduction to come from spending cuts.
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