UK fiscal consolidation too reliant on front-loaded tax hikes
Tuesday, October 19, 2010 at 01:24PM
Simon Ward

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:

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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