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UK fiscal consolidation too reliant on front-loaded tax hikes

Posted on Tuesday, October 19, 2010 at 01:24PM by Registered CommenterSimon Ward | CommentsPost a Comment

The expenditure cuts to be spelt out in tomorrow's Spending Review will be criticised for endangering the economic recovery. In reality, coming tax increases pose a much greater threat to growth next year.

The Treasury claims that 77% of planned fiscal consolidation between 2009-10 and 2015-16 will occur via expenditure restraint rather than higher taxes. The proportion, however, is lower in the early years – only 57% by 2011-12. This is because spending cuts are being phased in while tax rises are front-loaded.

The Treasury's estimate of the split, moreover, may be questioned. Expressed at constant (i.e. 2011-12) prices, total managed expenditure is projected to fall by just £2 billion between 2009-10 and 2011-12 versus a £45 billion increase in current receipts  – see chart. This suggests that taxes will bear 96% of the burden of adjustment by 2011-12 rather than the 43% claimed by the Treasury.

Tax increases announced by either the coalition or the previous Labour government (since the 2008 Pre-Budget Report), with estimates of the 2011-12 yield in brackets, include:

  • Rise in national insurance rates offset by higher thresholds / new business relief from April 2011 (£2.6 billion)

  • Restrictions on pensions tax relief from April 2011 (£0.6 billion based on previous government's proposals, rising to £4.0 billion in 2012-13)

  • Rise in main VAT rate to 20% from January 2011 (£12.1 billion)

  • Rise in insurance premium tax from January 2011 (£0.5 billion)

  • Bank levy from January 2011 (£1.2 billion)

  • Rise in higher-rate capital gains tax to 28% from June 2010 (£0.7 billion)

  • Additional 50% higher income tax rate from April 2010 (£3.1 billion, up from £1.3 billion in 2010-11)

  • Withdrawal of personal allowance from £100,000 from April 2010 (£1.5 billion, up from £0.9 billion in 2010-11)

These increases dwarf the planned £1,000 rise in the personal allowance (costing £3.5 billion in 2011-12) and a phased reduction in corporation tax (£0.4 billion, rising to £1.2 billion in 2012-13).

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