Opinion
5 Feb 2015 09:33am

A post-election strategy for taxation

Each year since 1981 the Institute for Fiscal Studies (IFS) has published its Green Budget – green in the sense of a green, or consultative, paper rather than green in the sense of environmental.

Its purpose is to put into the public domain accurate, independent and readily usable information to inform the debate about the public finances and policy options in the forthcoming budget.

None of the parties is keen to suggest that increasing tax is an option, or set out a strategy for taxation

It has become, over that time, a significant event in the fiscal calendar. Around 400 fiscal nerds turn up to hear IFS economists talking about tax policy, public spending and the deficit, while hundreds of thousands read it (or download it: ifs.org.uk).

Anyone who has tried to read Treasury and Budget documentation will understand the need for something like the Green Budget. We try to set out the issues and figures much more clearly, and unlike any government document we provide a fair assessment of policy options.

A staple of Green Budget analysis has been to question the official public finance forecasts. Under the last government we would typically suggest that, even on the basis of their own economic forecasts, the Treasury’s fiscal forecasts were too optimistic.

With the independent Office for Budget Responsibility (OBR) in place we no longer find ourselves doing quite that. But we are able to analyse a much wider range of scenarios and policy options than they are, and to pass some comment on policy decisions. The OBR is a much more open institution than the Treasury ever was so we have more data and information to analyse.

FOCUS ON CHOICES

This year we are, inevitably, focusing on the public finances and public spending choices. The challenge facing the next government, which will have to run a full-blown spending review during 2015, remains formidable. Our structural deficit – the part that won’t go away as the economy grows – is judged by the IMF to be among the very largest in the developed world.

Big cuts for 2015-16 have already been signed up to by all the main parties. Looking forward though, there is a big difference between Labour and Conservatives. Because Labour would be happy to borrow to cover capital spending, they need to find relatively modest cuts of £7bn or so after 2015-16. The Conservatives will need to find more than £30bn of cuts to meet their balanced budget rule. If they continue to protect, and indeed add to, spending on health and pensions then the consequences for spending on the rest of public services will be severe. The Conservatives may find it hard to make the cuts implied by their fiscal plans. Under Labour’s plans the deficit, and perhaps more importantly the national debt, would be higher.

Given the importance of these issues this year’s Green Budget includes three chapters on public finances, one on public service spending, one on health spending specifically and one on social security spending.

UNEXPLORED OPTION

Of course there is another leg to the fiscal stool – taxes. None of the parties is ever keen to suggest that increasing tax is an option. And none has ever set out a strategy for taxation. That’s extraordinary when you think of the strategy papers on every aspect of public spending. We try to fill part of that hole.

In 2011 we published a major review of tax policy – the “Mirrlees review”, named for Nobel Laureate Sir James Mirrlees who oversaw the work. In this year’s Green Budget we set out some of the options that a new government is likely to consider should it decide to raise taxes after the election (despite not having shared any such plans with the electorate before the election). History is clear on this. Post-election budgets tend to involve tax increases. Pre-election budgets do not.

In an innovation this year, we are pleased to be working with ICAEW, which is providing its own take on the fiscal situation, looking at the public finances not from the standard point of view of public finance accounting but by looking at the government’s balance sheet. This brings a new and important perspective to the way we think about the challenges facing government over the long run.


Paul Johnson is director of the Institute for Fiscal Studies. He is speaking at ICAEW’s FD Conference in May


 

 

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