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EDITIONS
 Wednesday, 30 January, 2002, 16:48 GMT
Will taxes have to rise?
Graph showing taxing and spending by government
After closing the budget gap, spending is rising again

The government may have to find an extra 7bn in tax increases to fund its programme of improving the public services, according to a leading think tank.

Tough budget choices this year for the Chancellor
Tough budget choices this year for the Chancellor
The Institute of Fiscal Studies (IFS) says that if the government adopts the same cautious approach it has done in the past, it will need to find 5bn in new sources of revenue to maintain a safety margin, and another 2bn to fund new programmes like the integrated child credit.

The IFS estimates that without additional taxes, the government's current budget surplus would disappear by 2003-4.

That conclusion was also endorsed by the European Commission, which warned Britain not to allow its public finances to fall into deficit.

Graph showing budget surpluses
But a UK Treasury spokesman said the Commission failed to take account of the importance of public investment and the impact of the economic cycle.

Andrew Dilnot, director of the IFS, told the BBC that "although it was not necessarily irresponsible" for the Chancellor not to build up this safety cushion, past experience suggested that the government would prefer to be cautious, guarding against any unpleasant surprises - and allowing any extra budget surpluses that resulted to be distributed to taxpayers nearer election time.

Budget decision

Gordon Brown will announce his sixth Budget on 17 April, and faces crucial decisions about the future of public spending.

The key is to bring into play resources from the private sector

Shadow Chancellor Michael Howard
Later in the year, the government will announce the results of its latest Comprehensive Spending Review, designed to fix spending plans for the next three years to 2005-6 and the next General Election.

Current plans assume that spending on health and education, which are growing at 6.4% and 5.4% annually at the moment, would be scaled back to the average rate of economic growth - 2.5%.

But the government has given many signals it will continue to spend more on these services to bring them up to 'world class standards.'

No scope for savings

Although health and education make up only 28% of total public spending, the IFS estimates that the government might need to increase government spending by slightly more than the long-term growth rate of the economy to make available more money in these areas.

Pressures on health spending are bound to rise
Pressures on health spending are bound to rise
If it aimed at a 2.75% annual increase in public spending, it would need to find an additional 1bn each year in higher taxes, while 3% increases would lead to tax rises of 2bn more each year, the think tank estimates.

The Conservatives warned the government against raising public spending faster than the economy could bear.

"The key is to bring into play resources from the private sector so that we can build the world class public services that we need in this country without unsupportable burdens on the taxpayer," Shadow Chancellor Michael Howard told BBC Radio 4's World at One.

Which taxes could rise?

The IFS suggested three main areas where the Treasury could raise additional revenue without breaching Labour's election tax pledges:

  • Higher national insurance payments
  • Increases in VAT
  • Bringing more people into the higher rate income tax band

The IFS estimates that abolishing the upper earnings limit on National Insurance, which is currently set to rise by inflation to 30,420 (585 per week) next year, would raise 5.9bn, while aligning the upper earnings limit with the start of the higher rate of income tax would raise 0.9bn.

Increasing VAT by 2.5% to 20% could raise even more, nearly 9bn - but in contrast to the changes in National Insurance, which would mainly hit the richest 20%, poor people would have a proportionally bigger tax rise if VAT was increased.

Finally, although the government is committed to leaving unchanged the basic and higher rate of tax, it could change the threshold at which higher rate tax begins, most easily by restricting the personal allowance to the basic rate only.

That would add one million people to the higher rate tax band, raising 2.6bn.

The Liberal Democrats have backed the case for a "small increase" in taxes to fund better health and education by those who can afford it.

LibDem Shadow Treasury spokesman Matthew Taylor said:

"The truth is, as was the case at the general election, that you can't get something for nothing, and in April the Chancellor will have to admit that's true."


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See also:

22 Jan 02 | Politics
02 Dec 01 | Politics
27 Nov 01 | Politics
07 Mar 01 | Budget 2001
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