This morning, the TPA will be releasing a new research paper (PDF) looking at how the different parties have responded to the fiscal crisis. The scale on which Britain is currently borrowing means that action is essential. If the structural deficit - at nearly 8% of GDP according to the IMF - is not addressed seriously soon after the next election then we risk losing our current credit rating. There is then a real risk of getting forced into much more brutal measures than would initially have been necessary as we are forced to take more and more drastic action to control the cost of borrowing.
The situation is worse because it follows a decade of tax rises. Families and businesses are already living under the burden of perhaps the most complex tax code in the world, the cost of everything from flying to selling a home has been steadily pushed up by tax hikes and we have fallen behind in the race to attract capital with low tax rates. What that means is that tax rises invariably fit into two categories:- Increasing taxes on capital or 'the rich'. These tax hikes might be politically satisfying but they are likely to raise little revenue, no revenue or even lose money and hurt the long term health of the economy.
- Increase taxes on those on low and middle incomes. This is the only way of reliably increasing revenue, but ordinary families are already facing huge pressure on their finances.
The Government have mostly proposed tax rises that fit in the first category. The 50p rate won't raise any money, it is an exercise in counterproductive distraction from the actual task of reducing borrowing.
On the other hand, many analysts think that the Conservatives are going to increase VAT to 20 per cent, after it has gone back up to 17.5 per cent. That would be very regressive, this graph from our report shows just how regressive:
- It will increase benefit dependency. A tax hike that hits low income households is likely to worsen the present situation where we take a significant amount of many people's money away in taxes then give it back to them in benefits, wasting money on bureaucracy and robbing people of their independence in the process.
- It will massively undermine Conservative attempts to demonstrate that they aren't the party of the privileged. Accepting the 50p rate to try and show that the Party isn't looking out for the interests of the rich first - which won't actually do anything for the poor - then putting in place an increase in VAT - which will really hurt the poor's interests - sends out a confused political message to say the least.
- It will combine with the increasing cost of climate change policies to push many families on low and middle incomes beyond the brink. As I wrote in an earlier post, climate change policy is heading for an affordability crisis as it pushes energy prices up towards becoming an intolerable burden on ordinary families. Exactly the same people hit hardest by increasing the cost of energy will also feel an increase in VAT the most keenly.
- Around £50 billion in spending cuts to provide an immediate fiscal tightening, as we proposed in our report (PDF) with the Institute of Directors.
- Fiscal rules with embedded expenditure targets. Research by the OECD suggests that rules without expenditure targets aren't effective, which might explain the last ten years in Britain, but rules with expenditure targets can make a big difference.
- Structural reforms to the public services to deliver greater productivity and ensure the tight spending settlements that expenditure targets will produce place as little pressure on public service output and quality as possible.
- Pro-growth policies. Lower spending, cuts in specific taxes that retard growth and the repeal of burdensome regulation would all add to the growth rate, which would make the task of rebuilding robust public finances a lot easier.