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Authors: Stuart Adam
The Liberal Democrats propose to increase the income tax personal allowance to £10,000 while keeping the level of income at which people start to pay the higher rate of tax unchanged. They say this giveaway would cost £16.8 billion in 2011-12. They also propose a set of significant tax-raising measures:
In total, the Liberal Democrats estimate that these tax increases would raise £19.2 billion in 2011-12, £2.4 billion more than the cost of their income tax cut. We will be releasing a full analysis of this package - and all of the main parties' tax and benefit proposals - in the coming days. But what can we say by way of an initial assessment of whether the sums add up?
Increasing the personal allowance to £10,000 does indeed look like it would cost around £16.8 billion (or at most a billion or so more), assuming that people do not change their behaviour in response to the tax cut. In practice it would encourage more families to have someone in paid work (and paying taxes), thereby reducing the cost.
Whether the tax raising proposals would raise what the Liberal Democrats expect is much more uncertain. They could raise more or less.
For the reforms to aviation taxation, the Liberal Democrats suggest that they would set the rate as high as is necessary to achieve the £3.3 billion extra revenue they want. That is perfectly feasible.
On the taxation of 'mansions', banks, pensions and capital gains, the data that are publicly available do not allow us to give a definitive costing. To arrive at their figures, the Liberal Democrats have had to make numerous assumptions. Some of these assumptions are questionable, and there are some mistakes, but while in some cases that implies raising less revenue than the Liberal Democrats estimate, in other cases it implies raising more. Their estimates for the mansion tax, the bank tax and the restriction of pensions tax relief do not seem unduly optimistic, while the reforms to capital gains tax would probably raise substantially more than the £1.9 billion they suggest. But there is a great deal of uncertainty around all these costings, given the paucity of relevant data available.
The estimate that £4.6 billion would be raised from their anti-avoidance and anti-evasion measures looks highly speculative. The Liberal Democrats have not attempted to estimate directly the impact of most of the measures they specify; they simply assume particular proportions of the total 'tax gap' attributable to evasion and avoidance that they think they could fill. Whether their approach would really raise so much more than the Government's continuing strenuous efforts must be open to question. For example:
Beyond these concerns, the fractions of evasion and avoidance that the Liberal Democrats claim their measures would eliminate are assumed arbitrarily (though in fairness we have no way to estimate them more accurately). They may be too high or too low. The Liberal Democrats acknowledge this uncertainty and describe their £4.6 billion figure as a 'target', but they are relying on the revenue to fund their income tax cut.
So what is the overall picture?
We can be pretty confident that the Liberal Democrats' headline giveaway would cost roughly what they claim. Whether the revenue raising measures would yield what they expect is much more uncertain - and we cannot even say with confidence whether they are more likely to raise too much revenue or too little. On the one hand, their estimates of the revenue to be raised from tackling avoidance and evasion seem optimistic; on the other hand, the estimates of the revenue to be raised from the rest of the package if anything look pessimistic. The only way to find out for sure would be to suck it and see.
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Cutting the deficit: three years down, five to go?
The UK is in the fourth year of a planned eight-year fiscal tightening. Following further announcements made in Budget 2013, this fiscal consolidation is now forecast to total £143 billion by 2017–18. The UK is intending the fourth largest fiscal consolidation among the 29 advanced economies for which comparable data are available. By the end of this financial year, half of the total consolidation is expected to have been implemented. However, within this tax increases and cuts to investment spending have been relatively front-loaded, while cuts to welfare spending and other non-investment spending have been relatively back-loaded.
The March Budget forecast that borrowing would fall by £0.1 billion from £121.0 billion in 2011–12 to £120.9 billion in 2012–13. On Tuesday, the Office for National Statistics is due to release its first estimate of public sector net borrowing in March 2013 and, therefore, for the whole of 2012–13. Borrowing could easily end up being higher or lower than it was in the previous year, either due to backwards revisions, the uncertainty inherent in forecasting borrowing even a month in advance, or both. However, whether borrowing is slightly up or down in cash terms is economically irrelevant. Either way, the bigger picture is that having fallen by roughly a quarter between 2009–10 and 2011–12, borrowing is forecast to be broadly constant through to 2013–14.
Women working in their sixties: why have employment rates been rising?
Employment rates through the recession have been remarkably robust, with today’s ONS figures showing employment remaining close to 30 million. The young have experienced historically low employment rates and high unemployment rates but the employment rate of women aged 60 to 64 has increased as fast since 2010 as it did during the 2000s. An important explanation is the gradual increase in the state pension age for women since 2010, which has led to more older women being in paid work. Without this policy change, the employment rate for 60 to 64 year women would have been broadly flat since 2010.