Chancellor may need £19bn in tax hikes to end austerity

Chancellor Philip Hammond would have to increase taxes by £19 billion – the equivalent of one penny on income tax, National Insurance and VAT – to meet Theresa May’s promise to end austerity while sticking to his plans to eliminate the deficit, a new report has found.

And the report by the Institute for Fiscal Studies said there will be “virtually no Brexit dividend” to relieve spending pressure on the Chancellor, despite Mr Hammond’s hopes of a boost if a withdrawal deal is agreed.

Even without taking into account the likely hit to tax revenues following Brexit, the Treasury can expect only a “modest” £1 billion-a-year saving on EU contributions by 2022/23 – a figure which could “easily” be outweighed by additional spending on bureaucracy, such as new border guards.

Unless economic growth is much better than expected, Mr Hammond will face the choice between “substantial” tax hikes or ditching his target of balancing the books by the mid-2020s, the IFS warned in its annual Green Budget.

If the Chancellor chooses to fund the end of austerity by raising taxes by 1% of national income, this would bring the overall tax burden close to its highest level since the end of the Second World War – though it would still be in the middle of the range for developed industrial countries.

Even £19 billion of tax increases by 2022/23 would be enough only to meet existing commitments on additional funding for health, defence and aid – including the the first three years of the five-year £20 billion boost promised to the NHS – while halting real-terms cuts in other areas, said the respected economic think-tank.

And this would still leave social security cuts totalling £7 billion to work their way through the system.

Describing this goal as “a minimal definition of the end of austerity”, the IFS warned: “Unless there are substantial tax rises, or much-better-than-expected economic growth, the Prime Minister’s aim of ‘ending austerity’ is unlikely to be compatible with the Chancellor’s aim of balancing the books by the mid-2020s.”

This leaves Mr Hammond with “the toughest of circles to square” in his October 29 Budget and next year’s Spending Review, said IFS director Paul Johnson.

The IFS found that the Government has already committed to £13 billion of additional spending on health, defence and aid between 2019/20 and 2022/23.

To end austerity, it would also have to halt £4 billion worth of cuts to day-to-day spending in other departments planned for next year, along with a further £2 billion pencilled in for the years to 2022/23.

Mr Hammond could find this £19 billion sum by hiking every rate of income tax, all National Insurance contributions and the main rate of VAT by 1p each, said the report.

But it also set out a series of alternative tax hikes to target the pain on better-off members of the older generation, including:

– Ending the practice of writing off Capital Gains Tax on assets in a deceased person’s estate, estimated in 2012 to cost £490 million a year;

– Abolition of Entrepreneurs Relief, which cost £2.7 billion in 2017/18;

– Charging employee National Insurance contributions on those over state pension age, raising around £1.1 billion;

– Reforming the “indefensibly generous” treatment of pension pots bequeathed after death, which are not subject to tax if the holder dies before the age of 75;

– Reforming council tax so bills are proportional to the value of a property, with a potential £8 billion a year raised if rates on the top four bands were doubled.

Mr Johnson said Mr Hammond’s tax and spend choices for the next spending review period, beginning in 2020, will be “the biggest non-Brexit-related decision this Chancellor will make”.

“He has a big choice. He could end austerity, as the Prime Minister has suggested.

“But even on a limited definition of what that might mean would imply spending £19 billion a year more than currently planned by the end of the Parliament.

“An increase of that size is highly unlikely to be compatible with his desire to get the deficit down towards zero.

“Alternatively, the Chancellor could stick to his guns on the deficit and leave many public services to struggle under the strain of a decade and more of cuts.

“He could reconcile these demands by raising taxes, and in principle there are plenty of good options, but the overall tax burden is already high by UK historical standards and he could be constrained by the lack of a parliamentary majority. This is going to be the toughest of circles to square.”

Shadow chancellor John McDonnell said: “This heaps yet more pressure on the Chancellor to explain how he is going to deliver on the Tory promise of ending austerity.

“With billions of cuts in the form of Universal Credit still to come, and public services at breaking point, tinkering around the edges is not enough.”

A Treasury spokesman said: “Our balanced approach is getting debt falling and supporting our vital public services, while keeping taxes as low as possible.

“This year, we have already committed an extra £20.5 billion a year to the NHS, scrapped the public sector pay cap, and frozen fuel duty for the ninth year in a row.”