TAX NEWS - June 2010

UK Tax: Osborne Should Cut Taxes, Slash Health Spending, Reform Says

U.K. Chancellor of the Exchequer George Osborne should cut funding for health, education and jobless benefits and reduce tax for the rich in his emergency budget next week, a research institute said today.

Reform, which includes lawmakers on its advisory board from both the Conservative and Liberal Democrat parties that make up the U.K.'s governing coalition, said the chancellor should also increase sales tax on children's clothes and food while means- testing or cutting benefits for families and the elderly.

"Tackling the deficit will be an undeniably painful process given the size of the deficit, the inefficiency of the public sector and the overreach of the government," Andrew Haldenby, Reform's director, said in an e-mailed statement. "The pain should be shared across society."

Middle-class families receive 31 billion pounds ($46 billion) in welfare through programs including universal child benefit, the winter fuel allowance for pensioners and statutory maternity pay, Reform said in its report, entitled "Taking the Tough Choices." There is "an immediate need to claw back these benefits to lower the overall costs of welfare," to help cut the near-record 155 billion-pound deficit.

The new Office for Budget Responsibility said June 14 that Britain has a bigger budget hole to fill than the previous Labour government forecast. Reform said its proposals would almost close the 82 billion-pound ($121 billion) shortfall foreseen by Labour in 2014.


Pension Tax Relief

Abolishing the 50 percent top tax rate on earnings over 150,000 pounds and reinstating pension tax relief for high earners would make Britain a more attractive investment location for global companies, the report said. It drew on models developed by Canada, New Zealand and Ireland in tackling their deficits.

"Because the cuts were sharp and deep they worked." Paul Martin, who was Canada's finance minister when that country reduced its public debt by 20 percentage points of economic output in the 1990s, wrote in a foreword to the report. "The vicious circle turned virtuous and the positive payback was not long in coming."

Osborne should trim 20 billion pounds of spending in the National Health Service, 18 billion pounds from government and the police and 12 billion pounds from spending on schools and universities in the next four years, the report says. Savings would come through greater efficiency and more use of the private sector to deliver services.