TAX NEWS - June 2010

UK Tax: UK Govt Could Hit Deficit Goals Without New Tax Hikes, says IFS

LONDON (MNI) - The UK government could achieve its deficit reduction aims without fresh tax hikes if it offers no tax cuts, the Institute for Fiscal Studies said Monday.

The IFS analysis came in the wake of the independent Office For Budget Responsibility projections and ahead of the June 22 budget. The OBR showed non-cyclical UK debt and deficits are expected to come in lower than forecast at the time of the March budget.

The Conservative/Liberal administration has yet to publicly reveal its deficit targets, but the IFS looked at one plausible deficit reduction aim in light of the new OBR figures.

Back in January, Chancellor of the Exchequer George Osborne talked about achieving "a cyclically adjusted balanced current budget by the end of the forecast horizon", or 2014-15.

"If the new coalition Government chooses to retain this target ...then this will necessitate spending cuts and tax rises of 1.6% of national income (stg24 billion) on top of the 3.4% of national income (stg51 billion) already planned by Labour," the IFS said.

Adding a margin of caution to achieve this goal would entail stg85 billion of fiscal tightening by 2014-15, the IFS said.

Osborne has repeatedly said he favours a ratio of 4:1 in terms of spending cuts to tax rises.

The IFS said this would imply spending cuts of stg68 billion and tax rises of stg17 billion.

The previous Labour administration's planned tax hikes would raise stg18 billion and "this suggests that a 4:1 ratio of spending cuts to tax rises, with a significantly accelerated reduction in the structural deficit over the course of a Parliament, could be brought about without any further net increase in taxes," the IFS said.

The IFS said, however, that if the new government presses ahead with plans to raise the National Insurance threshold and avoid the planned hike in national insurance contributions, these would require offsetting tax hikes.

"At least in part these revenues could come from the pledges in the coalition agreement to increase Capital Gains Tax and to increase taxation on air travel," the IFS said.

The IFS warns, however, that the spending cuts required to fulfill the 80/20 aim may be prohibitively large in those departments not protected by ring fencing.

Cuts in governmental departmental expenditure limits in non-ring fenced areas would need to be over 9% a year.

"This suggests that next week's Budget may contain some combination of an additional squeeze on DELs (Departmental Expenditure Limits), cuts in welfare payments and net tax increases so as to spread the pain," the IFS said.