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IFS Green Budget

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The Institute for Fiscal Studies, in association with the ICAEW and Oxford Economics, published its ‘green budget’ report on 7 February, looking at the issues and challenges facing the chancellor as he prepares for his Budget in March. One of the headlines from the report highlights the sharp cut in public spending planned for 2019/20 at the same time as tax is set to rise to its highest level in 30 years as a share of national income. Tax and non-tax receipts are expected to rise above 37% of national income for the first time since 1986/87. Overall, a net tax rise of £14.4bn is planned between 2015/16 and 2021/22, even after taking corporation tax cuts into account. The tax increases include over £5bn from measures announced before the 2015 general election, with a further £4bn announced in subsequent fiscal statements. These include the new dividend tax regime, increases in IPT and SDLT and the new apprenticeship levy.

According to the IFS, the OBR’s forecasts do not include the effects of tax cuts in the form of increases to the income tax personal allowance/higher rate threshold and freezing the rates of fuel duties in April 2017 which, taken together, will cost more than £4bn by 2020/21.

The government’s commitment to eliminating the deficit during the next parliament leads the IFS to predict that the period of spending cuts and tax rises will continue well in to the 2020s.

Paul Johnson, director of the Institute for Fiscal Studies said: ‘For all the focus on Brexit, the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne’. The chancellor’s target of eliminating the budget deficit in the next parliament will, said Johnson: ‘require extending austerity towards the mid-2020s’.

After nearly seven years of tax rises and spending cuts, the deficit this year will be higher than in all but 13 of the 60 years before 2008, and remains the fourth highest of 28 advanced economies.

Oxford Economics estimates that the UK economy could end up around 3% smaller in 2030 than it would have been if we had voted to remain in the EU, on the assumption that there will be a three-year transitional arrangement similar to the status quo, followed by a free-trade agreement.

Andrew Goodwin, lead UK economist at Oxford Economics said: ‘If the government is able to agree a transitional arrangement with the EU and make progress on a free-trade agreement then the impact of Brexit is likely to be fairly modest within our forecast horizon of 2021. However, the negative effects of leaving the single market and the customs union are likely to become clearer over time and we estimate that the new trading arrangements could reduce UK GDP by around 3% by 2030, compared with remaining in the EU’.

Other areas discussed in the report included the ‘costly, inefficient and unfair’ differences in the way the tax system treats the self-employed, owner-managers and employees. This notes that 39% of the growth in the workforce has come from the self-employed and owner managers over the last eight years. This has led the OBR to worry that tax revenues will be £3.5bn less in 2021/22, relative to where they might be, were the small company population and employment to grow at the same rate. The report states that: ‘different tax treatments also create incentives for people to change legal form to avoid tax and create inequities between people earning the same amount for doing similar work. It is both desirable and practicable to reduce these differences.’

The IFS also notes that the new apprenticeship levy will raise nearly £3bn a year, but government spending on apprenticeships in England is only expected to increase by £640m between 2016/17 and 2019/20.

Issue: 1341
Categories: News
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