Policy Exchange has repeatedly urged that the country’s fiscal problems should be addressed principally by spending cuts, combined with some tax rises. We have recommended a ratio of 80 percent spending cuts to 20 percent tax rises. The “structural” deficit in the UK (i.e. the bit of the total deficit that will still be there once the economy has recovered) is estimated by the Treasury at 9 percent of GDP, or about £125 billion. Not all of that needs to be eliminated quickly, but the vast majority of it does, say £100 billion. So on a ratio of 80:20 our position equates to £80 billion in cuts in underlying spending (spending that isn’t the direct result of the recession) and about £20 billion in tax rises.
The government has already committed itself (albeit without any real detail) to about £38 billion in spending cuts and £19 billion in tax rises. So, essentially, the government has already announced enough tax rises. That’s not to say that the structure of tax (what we tax) need not change, but the aggregate amount will be enough if the government’s tax hikes are implemented. But there needs to be about £40 billion more spending cuts quickly (since £80 billion in spending cuts and £20 billion in tax rises would still leave a £25 billion structural deficit, there would be work left to do, but the “heavy lifting” would have been achieved) — say, over the period 2011-2014.
Our position is not universally shared. There are still many journalists and politicians who believe that significant spending cuts are either not necessary or cannot, as a matter of practicality or political acceptability, be delivered, or that they would damage economic growth if implemented. Instead, they suggest, the deficit will have to be cut by raising taxes.
We dispute every part of this tale, but let us assume it were true for a moment. So, instead of implementing £80 billion in spending cuts and £20 billion in tax rises we raise taxes by £100 billion. Here are a few options, so journalists and politicians can get a handle on what they are really proposing. One could raise £100 billion in taxes by any one of the following:
• Raising the basic rate of income tax to 45p
• Raising the rate of VAT to 37.5%
• Abolish all income tax allowances and raise the corporation tax rate by 60 percentage points
Fancy any of these? Think any of them more politically deliverable than £80 billion in spending cuts? Believe that implementing any of these wouldn’t damage the economy?
Surely there must be other ways we could raise the money? Indeed! We could also get £100 billion by doing the following:
• Abolish all tax relief on pensions (both employer and employee) and make profits on main homes subject to capital gains tax and impose VAT on food, new houses, books, children’s clothes, water and prescription medicines and impose VAT at the full rate on domestic fuel and impose VAT on museums, galleries and other local authority non-business purchases and services to the NHS and abolish all capital allowance offsets to corporation tax.
Frankly, that’s about it.
Politically feasible? Obviously not. Economically disastrous? Surely. Silly even to discuss it? We think so. So shall we get back to discussing those £80 billion in spending cuts, then?
Andrew Lilico is the Chief Economist of Policy Exchange