TAX NEWS - June 2010

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

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

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."

Prime Minister David Cameron pledged before the May 6 election that brought him to power to protect spending on the National Health Service and overseas aid, while the Liberal Democrats argued that no area of government expenditure should be out-of-bounds. Osborne will announce his emergency budget on June 22.

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 today in its report, "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.


Bigger Hole

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 shortfall foreseen by Labour in 2014.

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 the 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."


Health Trimmings

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 said. Savings would come through greater efficiency and more use of the private sector to deliver services.

Labor unions said such cuts risk plunging the U.K. into a double-dip recession by choking off fragile economic growth. The government should raise taxes for the most wealthy and work for an international strategy for growth, said Brendan Barber, general secretary of the Trades Union Congress.

"Voters did not vote for cuts in health, education, pensions, the police and for privatizing the road under their feet," Barber said in an e-mailed statement. "The cuts program increasingly looks less like economics and more like a political project to restructure the state and roll back support for not just the poor and vulnerable but the services on which middle- income Britain depends."

A TUC report, entitled "All Pain No Gain: The Case Against Cuts," said Canada's deficit-reduction program was successful because there was a growing global economy, not because of spending cuts. Economic expansion is the only way to tackle the deficit, it concluded.

Evidence from Canada, the U.K. in the 1980s and Ireland since 2008 shows the cuts caused a decline in public services, rising unemployment and increased suffering for the most vulnerable, the TUC report said.