Osborne’s £3bn tax black hole

George Osborne's plans to block the National Insurance rise have been ridiculed by Labour. But the Tories have a £3bn black hole in their own tax rising plans.

George Osborne’s plans to block the Government’s National Insurance rise “by cutting waste” have been ridiculed by Labour using David Cameron’s own words. But the Tories’ plans reveal a £3 billion black hole in their own tax rising plans.

Labour has attacked George Osborne’s announcement this morning by highlighting David Cameron’s own words at a speech in Birmingham in May 2008 where the Tory leader said:

“At the last election, we produced something called the James Review. A long list of all the government functions, quangos and bureaucrats a Conservative government would cut …

“And the James Report was a serious and impressive piece of work. But was the overall approach credible? I’m not so sure. To make a long list of efficiency savings in advance of an election; to add them up to produce a great big total; to turn that total into debt reduction, spending increases elsewhere and a tax cut…?

“People didn’t believe it, for the very good reason that controlling public spending is not about a one-off efficiency drive, it’s about a whole new culture of government. There is a simple fact which political historians amongst you will know very well. The government ‘efficiency drive’ is one of the oldest tricks in the book. The trouble is, it’s nearly always just that – a trick.”

But analysis by Left Foot Forward shows that the Tories’ own deficit reduction plan now faces a £3 billion blackhole in their tax rise plans. Ken Clarke has said that the Conservative party want to achieve the EU target of reducing the “Treaty Deficit” to 3 per cent by 2014-15 with one-fifth of the consolidation coming through tax rises. As we showed last week, this equates to £16 billion of tax rises by 2013-14. The Government meanwhile has a slower deficit reduction plan with a larger chunk – £19 billion – made up of tax rises.

If the Tories are to scrap £6 billion of Labour’s planned tax rises and still meet their stated objectives, it leaves a £3 billion gap in their tax raising plans. To retain any credibility, the Conservatives will have to set out how they will plug this £3 billion black hole. Will it mean a rise in VAT?

Labour’s £19 billion of planned tax rises includes:

• an additional rate of income tax of 50 per cent for incomes over £150,000 and the restriction of the personal allowance for those with incomes of over £100,000, from April 2010;
• the restriction of pensions tax relief for those with gross of incomes of £130,000 and over, from April 2011;
• a one percentage point increase in the employee, employer and self-employed rates of National Insurance Contributions (NICs) from April 2011; and
• a one penny per litre above inflation increase in fuel duty and real terms increases to alcohol and tobacco duties, due to be delivered in each year to 2014-15.

UPDATE 15.09

Both Next Left, Labour List, and Liberal Democrat Voice reckon that Osborne’s announcement is a strategic error by the Tory shadow chancellor while Hopi Sen ridicules the move. Meanwhile, the mainstream media have looked at the analysis from the Institute for Fiscal Studies: “surprise in figures” says The Times; puts “recovery at risk” according to the Guardian. The IFS conclude:

“Reducing the deficit more quickly than the Government plans to will therefore require even greater cuts to public services spending, or to greater reliance on welfare cuts or tax increases that might be as economically costly as the NI increases they are seeking to mitigate.”

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18 Responses to “Osborne’s £3bn tax black hole”

  1. Michael Hanley

    RT @leftfootfwd: Osborne's NICs cut reveals a £3bn tax blackhole in his deficit reduction plan http://bit.ly/cZ73Om

  2. Claire Spencer

    Ran out of space on the fag packet? RT @leftfootfwd: Osborne's NICs cut reveals a £3bn tax blackhole in his […] plan http://bit.ly/cZ73Om

  3. AndyG

    RT @leftfootfwd: Osborne's NICs cut reveals a £3bn tax blackhole in his deficit reduction plan http://bit.ly/cZ73Om

  4. Ann Danylkiw

    RT @leftfootfwd: Osborne's NICs cut reveals £3bn tax blackhole in deficitreduxplan http://bit.ly/cZ73Om <<Chancellors all on C4 tonight! 8pm

  5. unslugged

    RT @leftfootfwd: Osborne's NICs cut reveals a £3bn tax blackhole in his deficit reduction plan http://bit.ly/cZ73Om

  6. topsy_top20k_en

    Osborne's NICs cut reveals a £3bn tax blackhole in his deficit reduction plan http://bit.ly/cZ73Om

  7. Martin Johnston

    RT @leftfootfwd: Osborne's NICs cut reveals a £3bn tax blackhole in his deficit reduction plan http://bit.ly/cZ73Om #reasonsnottovotetory

  8. Ewan Nicholas

    …and @Leftfootfwd have just found a £3bn hole in the Tories' tax plans toboot http://bit.ly/cZ73Om #toryfail

  9. Alan W

    Great quote from Cameron. Hoist by his own petard.

    I must say I was a bit taken aback by this announcement from Osborne. Even by his feeble standards it really was pathetic. “Efficiency savings” and “cutting waste” are pretty much a standing joke in politics these days.

    If it was only a few million, or even a few hundred million pounds that he was trying to cover he might have got away with it. But seven billion quid! It’s just laughable. He’d have more credibility if he said he was hoping the tooth fairy would leave the cash under his pillow.

  10. Evidence based? Really?

    If efficentcy savings and waste management are a running joke, why have Labour put them at the heart of their deficit management tactic? The bigger joke is that they’ve allowed them to accumalate for the last 13 years and only now see them as a problem.

  11. Billy Blofeld

    Cut the Trade Union Modernisation Fund. Given all the strikes at the moment, that is surely one area of efficiency nobody will quibble with.

  12. Ludwig Wittgenstein

    How many people earning less than £20k will be made redundant or placed on short-time so that those earning over £20k may be excused the NIC increase? What effect will that have on consumption and the economy? What will the consequences be for JSA and other benefits? How many additional jobs at less than £20k will not be created to allow those earning more than £20k to escape?

  13. Rosanna

    RT @leftfootfwd: Osborne's £3bn tax black hole http://bit.ly/cZ73Om

  14. Alan W

    Predictions of job losses arising from the NI increase are almost certainly seriously exagerated. Just as with the similarly hyperbolic predictions made when the minimum wage was brought in, they overestimate the sensitivity of the demand for labour to fluctuations in price. There are unlikely to be many jobs in the economy so marginal that £150 a year is going to make the difference between them existing or not existing. What would undoubtedly push up unemployment would be cutting public expenditure before the economy is firmly on the mend.

    As for Labour’s own “efficiency savings”, I’m as sceptical of these as I am of those the Tories are putting forward. It’s just that the Tories are supposedly going to save twice as much, which makes for an even more incredible claim. It seems odd that a party who supposedly have deficit reduction as their number one priority, should start out by digging an even bigger hole and then filling it with hot air.

    At least Labour have also commited themselves to some significant revenue raising measures. The Tories on the other hand can’t seem to open their mouths without clocking up more unfunded committments. I notice they seem to have gone quiet on the freeze of income tax bands they were raging about immediately after the Budget. I guess squeezing yet another couple of billion out of efficiency savings was too much even for George Osborne to announce with a straight face.

  15. Robert

    Simple and very crude calculations – an increase in VAT by 2.5% on approx £20k spend = APPROX £500. Tory NI reduction £150 if you are lucky.

    No brainer.

    VAT up to 20% after the election rakes in far more than needed to pay for this NI wheeze.

  16. Mr. Sensible

    The trouble is they make a lot of noise about needing to cut the debt but then anounce these brand new spending plans, including this.

  17. El Sid

    Bit rich for Labour types to be going on about a possible future £3bn spending hole when the current government is managing a £167bn spending hole in just one year. You’re about 10 years too late to be highlighting spending holes.

    As for their reluctance to tackle waste, is that possibly because they fear the public sector unions more than they want to stop wasting our taxes?

    @Robert – are you assuming that VAT on £20k of spending includes things like food and housing? Oops.

  18. Poor old George Osborne | TMP Online

    […] on the poster campaign, louder criticisms from his own side, more accusations of failing to do basic budget sums, and now it seems only the Guardian’s political editor is brave enough to defend him. […]

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