Osborne’s ideological tax cuts will have to be financed

As noted in our Politics Summary, George Osborne is taking a bit of a kicking today over his pre-election claims that Britain was risking a “Greek tragedy“. But an unreported section of the Institute for Fiscal Studies’ analysis yesterday of the Office for Budget Responsibility report suggests that Labour’s planned tax increases would have delivered the fiscal retrenchment that the Chancellor was committed to and that the only justification for any new tax rises, such as to VAT, is either an admission that their plans have the wrong balance of spending cuts to tax increases or to pay for the Lib-Con’s masochistic and ideologically driven tax cutting plans.

Today’s papers are broadly united. The Financial Times says, “Official verdict is that UK is not Greece“; the Independent says, “The Chancellor is overplaying the scale of the black hole“; while in the Telegraph, Spectator Editor Fraser Nelson writes that:

So when Mr Osborne declared yesterday that “it’s worse than we thought” he had precious little to point to. The so-called structural deficit (the amount of overspend that will not be eliminated by an economic recovery) is a little bigger than had been estimated. But crucially, Mr Osborne’s election goal – to abolish “the bulk” of the structural deficit by 2014 – would have been easily achieved had Mr Darling remained in place. No more taxes need to be raised, or budgets cut, to honour this Tory manifesto pledge.

The IFS examined this claim in more detail and looked at a different scenario in which the Coalition Agreement’s aim for “a significantly accelerated reduction in the structural deficit over the course of a Parliament” was realised. Using the Conservative’s pre-election preference for the tightening to be delivered in a ratio of 4:1 spending cuts to tax rises, they concluded:

“To achieve this would imply spending cuts of £68 billion and tax rises of £17 billion [£85 billion in total or £34 billion more than under Labour’s plans]. We estimate that, based on Treasury figures, the tax rises put in place by Labour would increase tax revenues by £18 billion. This suggests that a 4:1 ratio of spending cuts to tax rises, with “a significantly accelerated reduction in the structural deficit over the course of a Parliament”, could be brought about without any further net increase in taxes.

“However it does imply that any new tax cuts would need to be financed through tax rises. So, for example, the new coalition Government’s commitments to increase the income tax personal allowances, to recognise marriage in the income tax system, and to offset the increase in employers’ National Insurance Contributions planned for April 2011 would need to be financed through tax rises elsewhere. At least in part these revenues could come from the pledges in the coalition agreement to increase Capital Gains Tax and to increase taxation on air travel.

So when George Osborne stands up to deliver his Emergency Budget next week, listen out for any new tax cuts such as the ones listed above. These will all be ideologically driven and will lead to increase the amount of spending cuts and tax rises elsewhere.

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