Andrew Lilico is Chief Economist of Policy Exchange.
The current debate over public spending has involved claims by Conservative frontbenchers that departmental expenditure limits (DELs) will have to fall by 7% after 2011 and may need to fall by 10% in some areas — these figures, of course, being those implied by Labour’s 2009 Budget, a fact that a number of Labour minister appear not to grasp. One only hopes that the Treasury ministers, in particular, will have a better grasp of their own figures shortly. Of course, cuts of 7%-10% in DELs are neither nearly sufficient in the way of cuts nor is post-2011 rapid enough. Labour’s own plans indicate that they would be likely to need to reduce their plans by a further £40bn-£60bn in today’s money (the Budget states that this will occur after 2014) and the Conservatives would be likely to seek additional cuts over-and-above this. Furthermore, these cuts would need to happen more quickly than currently scheduled if the country is to avoid a gilts crisis that could come as soon as late next year. But the message about the need for cuts is at least now being debated.
A number of Government ministers, notably Byrne and Balls, have suggested that Conservative plans are driven by the need to find funding for the pledge, announced in the autumn of 2007, to raise the inheritance tax (IHT) threshold to £1m. Let’s examine that claim for a moment.
A 7% reduction in DELs by 2014 equates to just under £25bn in today’s money. The Conservatives claim that the IHT pledge is fully funded by a pledge to impose a levy on non-doms. The Government disputes whether such a levy would raise as much as the Conservatives claim, but this is broadly irrelevant, for even the gross cost of the IHT pledge, before netting off the non-dom levy, is tiny relative to the DELs reduction. In 2007 the gross cost was estimated at £3.1bn. Thus even that figure for the gross cost of the IHT pledge was only one eighth of the proposed spending reductions and not plausibly attributable as the driver of such plans. But since then the cost of this pledge has fallen dramatically, for, firstly, the Labour Government introduced its own version of the scheme effectively raising the nil rate threshold to £650,000 for married couples, but also because the pledge was made at the very peak of the housing market and the main driver of the cost was the number of people drawn into paying inheritance tax by rising house prices. Now that house prices have fallen by over 20% the cost of the IHT pledge is well down. In answer to a Parliamentary Question in February, Financial Secretary to the Treasury Stephen Timms stated that the Treasury’s estimate is now that “The cost of increasing the inheritance tax threshold to £1 million with effect from April 2009 is estimated at £500 million in 2009-10, £1.2 billion in 2010-11 and £1.3 billion in 2011-12”.
In the context of some £25bn in cuts already announced in the Budget, and implied cuts of an additional £50bn to come, the allegation that Conservative plans are driven by the £0.5bn-£1.3bn gross cost (before funding by a non-dom levy) of the IHT pledge is one of the sillier notions in this debate so far.
