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Last Updated: Friday, 22 April, 2005, 13:19 GMT 14:19 UK
Labour 'still has budget hole'

Labour's spending plans for the next economic cycle could still leave an 11bn funding gap, according to the independent think tank, the Institute for Fiscal Studies (IFS).
Income Tax form
Taxes may have to rise under any party

It says that Labour Chancellor Gordon Brown is over-optimistic over the amount of tax revenue he expects to receive over the next five years in order to close the budget gap that has opened up in recent years.

Under Labour plans, announced in the budget, the total tax received by the government is expected to rise from 38.3% of national income to 40.6%, mainly from sharp increases in corporation taxes and "fiscal drag" which pulls more people into higher tax bands.


But the IFS says an expectation of a 30% increase in corporation tax receipts is optimistic, and points out that the Chancellor has consistently over-estimated his tax revenue for the last few years - by around 10bn a year.

Under the government's rule, public spending (except for investment) and taxes must balance over the economic cycle as a whole.

Whoever takes office after the election, the tax burden is likely to be higher at the end of the Parliament than it is at the end of this one
Robert Chote, Director, Institute for Fiscal Studies
Mr Brown has consistently denied that his forecasts are optimistic, pointing out that he has proved his critics wrong in the past.

But other international organisations, including the OECD and the International Monetary Fund, are also warning that taxes may have to rise to close the budget deficit.

Conservative savings?

The Conservative Party has seized upon the IFS figures to warn that taxes will rise under Labour.

Its tax and spending plans, which are also analysed by the IFS, have an 8bn reserve to close the budget gap.

That is twice as big as the 4bn they plan to use for tax cuts.

But the IFS warns that one should be "cautious" that the Conservatives can fund these two measures by cutting 12bn of non-essential spending from the government (as they propose in their James review).

It says that while savings from abolishing government functions altogether are credible, "efficiency" savings by improving government operations have never yielded as much as claimed in the past.

And it says the Conservatives are planning some very large cuts to some government departments, including nearly 40% reductions in the budgets of Defra (food and environment), OPDM (housing), and the non-schools education budget.

In the longer run, the IFS says the scope for further tax cuts under Conservative plans would be "modest", and that its own spending cuts would only reverse half of Labour's additional spending increases since 1999.

Liberal Democrats

The IFS says that, since the Liberal Democrats have accepted Labour's economic assumptions, they are also likely to face the same budget shortfall as Labour.

The Liberal Democrats are planning to both raise spending and increase taxes by an equal but relatively small amount, so that the budget gap is projected to be the same.

But the IFS warns that a "key risk" is that either the local income tax or the new 50% tax rate on earnings over 100,000 would fail to raise as much revenue as they hope.

And they say that some of their policies, for example free personal care for the elderly, could also prove more expensive than planned.


Despite the fierce rows over tax and spending, IFS Director Robert Chote points out that there is much more convergence between the parties' policies than ever before.

Under all three parties, tax will rise as a proportion of the economy, and public spending will stabilise at around 40% of GDP.

"Whoever takes office after the election, the tax burden is likely to be higher at the end of the Parliament than it is at the end of this one," Mr Chote said.

And all three parties have accepted Labour's fiscal spending rules as well as their monetary policy framework of an independent Bank of England.

"In these respects, the similarities between the parties are as striking as the differences," he added.



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