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Wednesday, 28 November, 2001, 17:37 GMT
How big could tax rises be?
by BBC News Online's Steve Schifferes

Gordon Brown might have to find extra revenues of 13bn per year - equivalent to nearly 5p in the pound more on income tax - to fund his ambitious plans announced in the pre-Budget report on Tuesday.

The figure, from the independent Institute for Fiscal Studies, gives some indication of the magnitude of the task facing the government in its drive to modernise the National Health Service and give more help for children, pensioners and the low-paid.

New spending commitments
Health: 10bn
Child tax credit: 2.8bn
Pensioner credit: 2bn
The IFS's Carl Emmerson also suggested that the Chancellor was running out of "wiggle room" with the government's cushion - including the contingency reserve and the current budget surplus - being reduced by around 4bn from its normal levels over the next two years.

The numbers are only estimates, as the government has not yet quantified the scale of its ambitions - but they explain why Mr Brown was keen to stress that he had not ruled out tax increases and called for a national debate on funding the NHS.

Tax shortfall

By the summer, the government will have to take some basic decisions on whether it continues to expand public spending faster than the economy is growing.

If it does, there is likely to be a funding gap of between 4bn and 7bn each year which must be met by higher taxation or more borrowing, starting in 2003-4, according to the IFS.

In addition, Mr Brown has confirmed two major new measures to help pensioners and families in the pre-Budget report.

The new pensioner credit, to help encourage savings by topping up income support, is costed at 2bn each year - and now figures in Budget plans.

But the new child tax credit, which will combine the Working Families Tax Credit, income support, and income tax credits, could cost another 2.8bn, the IFS estimates - and is not included.

Anything lower, and millions of middle class households would be made worse off by the tax changes.

Meanwhile, the government has estimated that its tax revenues will plunge by 10bn next year as financial sector firms trim bonuses and face lower profits.

Andrew Dilnot, head of the Institute for Fiscal Studies, pointed out there were a number of ways that the government could raise tax revenue without breaking its pledge to keep the basic and higher rate of income tax unchanged.

They include higher National Insurance charges, restricting personal allowance tax relief to the basic rate, and higher company taxation.

Health target

Mr Brown placed health spending at the centre of his ambitions as he released the interim report of the long-term funding of the NHS.

It is still unclear how much more money will go into the health service, but Tony Blair re-affirmed at Prime Minister's Question Time on Wednesday that he wanted the UK to be spending at least as much on health as a proportion of national income as the EU average.

The EU as a whole spends 8.1% of GDP on health, compared with 6.9% in Britain.

That would imply extra funding of some 1.2% of GDP, or more than 10bn each year, to bring spending up to European levels by the end of this Parliament - even after the 7.3% increase in health spending next year announced by the chancellor.

According to Christine Frayne of the IFS, to meet the European target health spending would have to rise by 8.5% annually over the following two years.

The Conservatives argue that much of that funding should come from the private sector - but Labour believes that the bulk of the money will have to come from public funding.

Of course, if the government was prepared to delay meeting its target on health spending then any tax increases could be stretched out over a longer period.

But, according the IFS, it is unlikely that cuts to other spending programmes, or increased borrowing, could provide enough money to fund Mr Brown's ambitious programme in the long-term.

The government's pre-Budget report will be on 27 Novewmber






See also:

28 Nov 01 | Health
28 Nov 01 | UK Politics
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