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Tuesday, 15 May, 2001, 16:45 GMT
Do Tory tax plans add up?

by BBC News Online's Steve Schifferes

At the centre of the Conservative election manifesto is the promise to cut taxes.

The Tories want to reduce taxes initially by 8bn each year, with more to come later in their term of office.

"All over the world, governments of all political persuasions are cutting taxes on people and businesses... Conservatives trust people to spend their own money," their manifesto says.

But Labour and the Liberal Democrats insist that the Tory tax promises do not add up, and will force them to make cuts in vital public services.

How should we evaluate these claims?

Conservative plans

The Conservatives have emphasised tax cuts on fuel, abolition of tax on savings and dividends, and the partial restoration of the married couples' allowance as their key priorities.

Tory tax cuts
Cut savings taxes: 3bn
Cut fuel tax: 2.2bn
Restore married couples allowance: 1bn
Increase child tax credit: 0.3bn
Raise pensioners allowance: 0.8bn
Total: 8bn
The headline-grabbing 6p per litre cut in fuel tax would cost 2.2bn a year, while the abolition of tax on savings for basic rate taxpayers would cost 3bn.

The partial restoration of the married couples allowance, which would only apply to families where only one partner was in work, would cost 1bn.

That is less than half of the value of the married couples allowance in the last year before it was abolished.

The Tories are also spending about 1bn on cuts in tax for pensioners and families with children.

Other measures to help business, such as the abolition of the controversial IR35 rules on self-employment, and business rate reductions, are costed at less than 500m in total.

Labour says the tax cuts add up to 10bn, arguing that the petrol tax cut would cost an extra 500m and that abolishing IR35 would cost 1bn, not 100m.

That latter point is questionable - no one is sure how much tax avoidance costs the Exchequer, and Labour is quoting a higher figure than originally estimated.

Long-term plans

Labour and the LibDems say that the Conservatives are actually planning on 20bn of tax cuts, basing their assertion on an article in the Financial Times which quoted an unnamed Tory shadow cabinet minister as saying that figure was realistic by the end of the next Parliament.

The Tories have indicated that in future, they are looking to make major changes in other personal taxes, including changes to the threshold beyond which people begin paying the higher, 40% rate of income tax, and reductions in inheritance and capital gains taxes.

But they have also said that they have no concrete plans to make 20bn of tax cuts - it would depend on the economic circumstances later on.

However it is plausible that in principle, Conservatives might want to continue tax cuts at the same rate at the end of their term of office as in the first two years.

Where are the savings?

There is considerable controversy focuses on where the savings to fund the tax cuts are coming from.

The Conservatives say they have identified 8bn in spending cuts.

Tory spending cuts
Social security: 2.5bn
Housing and regions: 1bn
Government bureaucracy: 1.8bn
University endowments: 1.3bn
New Deal: 0.6bn
Legal aid: 0.3bn
But Labour and the Liberal Democrats say these savings are "bogus".

And they are backed up the by independent Institute for Fiscal Studies, which says that many of the proposed savings are doubtful, and that "in the long run, a desire to reduce taxes must be matched by a willingness to identify reductions in the scale of public services."

However, the Conservatives have also pledged to continue with Labour's spending plans on health, education, crime, and transport, and defence - which amount to 166bn, or 42% of government spending.

That means savings must come from the remaining areas of public spending - of which social security is by far the biggest. plans to save 1bn from cracking down on welfare fraud are not realistic, as are assertions that cuts in the government bureaucracy to yield nearly 2bn in savings.

Couldn't they borrow the money?

Labour and the Liberal Democrats say that the difficulty with realising these savings means that the Conservatives will have to cut spending on health and education.

And they point to other commitments, for example on prisons and asylum seekers, which they estimate would cost 1bn-2bn each to implement.

However, the truth is that the scale of the Conservative tax cuts are fairly small in a total of nearly 400bn in public spending.

The government is currently running a budget surplus of 15bn, 5bn higher than it expected, so in the next few years - if tax receipts remain buoyant - there would be some scope for more tax cuts or spending increases.

The difficulty would come - as with Labour plans - in the medium term, when the surplus will evaporate, and harder choices on tax or spending would have to be considered.

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