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April 2010
Article
No new taxes?
Type: Observations
Authors: Robert Chote and Carl Emmerson

The Conservative manifesto did not tell us anything about their tax and spending plans we did not already know. In particular, it was no more explicit about how much more ambitious the Conservatives would be than the Government in reducing the budget deficit over the medium term. The Conservatives promised only "to eliminate the bulk of the structural deficit over the Parliament", a vague goal that the Government would argue that it is on course to achieve already.

The best clue to the Conservatives' fiscal ambition is their earlier commitment to balance the structural current budget deficit (i.e. that part of Government borrowing which is neither used to fund investment nor is the result of the temporary weakness of the economy) by the end of the forecasting horizon. Unfortunately, they refuse to say yet what their forecasting horizon would be, but it seems reasonable to assume that it would remain five years as under Labour now.

A five-year horizon implies that in 2015-16 the Conservatives would need to deliver the spending cuts and tax increases of 4.1% of national income (£60 billion in today's terms) that Labour is already intending for that year, plus an additional 0.6% of national income (£9 billion). (Labour would make that additional tightening too (plus an extra 0.1% of national income or £1 billion), but not until the following year.) This acceleration of the tightening timetable would be consistent with David Cameron's comment at the manifesto launch that the Conservatives want to go further than Labour in dealing with the deficit, and not just start earlier.

The Conservatives have also signalled that they would prefer to see deficit reduction measures split 4:1 between spending cuts and tax increases, rather than the 2:1 split implied by the Government's plans. If they aim for the same overall tightening of 4.8% of national income or £70 billion in today's terms as the Government, then a 4:1 split would imply an eventual spending cut of around 3.8% of national income (£56 billion) and a tax increase of around 1.0% of national income (£14 billion). If the Government was to stick with a 2:1 ratio throughout its planned tightening, it would be looking for eventual spending cuts of 3.2% of national income (£47 billion) and tax increases of 1.6% of national income (£23 billion).

The tax increases that the Government has already announced will deliver about 1.2% of national income (£17 billion) in the medium term, suggesting that they might need to announce further tax increases worth around 0.4% of national income (£6 billion). Of the 3.2% of national income spending cut (£47 billion) they need, their plans to 'protect' (but shrink as a share of national income) non-investment spending on the NHS and part of the education budget, offset by a rise in the share of national income spent on overseas aid, would get them only a small part of the way there. We would have to wait for a Labour Spending Review to see where much of the rest fell.

Under their desired 4:1 ratio, the Conservatives would need a tax increase of 1% of national income, smaller than the 1.2% of national income that the Government has already announced. But their National Insurance cut, marriage tax break and freezing of council tax in England (minus the proceeds of their bank bonus tax) would more than exhaust this cushion and so the Conservatives too would likely need to announce further tax raising measures to get the job done. We will address this issue more definitively when we compare the deficit reduction plans of all three parties in a few days' time.

All these calculations are based on the Treasury's latest forecasts in the Budget. And, of course, there are huge uncertainties surrounding them, especially over a period of five or six years. The necessary fiscal repair job could yet turn out be much larger or smaller than we now think.

Given the current forecasts, let alone the uncertainties surrounding them, the Conservatives were wise not to make a "read my lips, no new taxes" pledge in their manifesto. William Hague only went so far yesterday as to say: "We are not looking for tax rises", which does not rule anything out. The Conservatives also eschewed Labour's manifesto promise not to increase income tax rates or extend VAT, a pledge that leaves the door open to many other tax increases - just as similar pledges in Labour's last three manifestos left the door open to the substantial tax increases they have implemented since 1997.

Of course, the Conservatives are left having to identify an even bigger spending cut overall than Labour in the next Spending Review and beyond. And, like Labour, they have only identified where a small proportion of the cuts will come from.

An obvious question is whether it is really realistic to expect spending cuts to bear as much of the burden of the fiscal tightening as the Conservatives intend, given the likely consequences for public services and the generosity of the welfare system. Bear in mind that the ratio of discretionary spending cuts to tax increases in the last big fiscal tightening undertaken by a Conservative government, under Norman Lamont and Kenneth Clarke in the early 1990s, looks to us to have been around 1:1.

Whoever forms the next Government, it is hard to escape the conclusion that there are likely to be more tax increases to come.

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