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IFS Green Budget sees Brexit amid ‘global sea change’

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In its 2019 Green Budget report, the Institute for Fiscal Studies (IFS) contemplates the case for tax cuts to provide a stimulus to the economy following a no-deal Brexit, while stressing that any fiscal giveaway should be temporary.

The IFS Green Budget looks at the issues and challenges facing the chancellor as he prepares for the forthcoming Budget. Among its headline findings, the IFS notes that now ‘is not the time to be implementing substantial and permanent net tax cuts’.

In the event of a no-deal Brexit, the IFS believes the damage done to the economy would require some combination of tax rises and spending cuts over the longer term. However, in the near term there could be a case for a temporary fiscal giveaway, targeting parts of the economy where the short-run dislocations were particularly marked.

IFS director, Paul Johnson, said: ‘Given the extraordinary level of uncertainty and risks facing the economy and public finances, [the government] should not be looking to offer further permanent overall tax giveaways in any forthcoming Budget. In the case of a no-deal Brexit, though, it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy’.

In a pre-released chapter last week, the IFS examined the prime minister’s proposed income tax higher-rate and NICs threshold increases, describing them as, ‘a substantial and expensive tax cut from which only those on high incomes would gain’.

The Green Budget report also sets out its forecasts for the UK economy under four distinct Brexit scenarios:

  • continued Brexit delay, with further fiscal loosening of 1-2% of GDP, growth stays below 1% in 2020 and remains below 1.5% in 2021 and 2022;
  • a no-deal scenario accompanied by significant fiscal loosening of 2%, interest rates cut to zero alongside £50bn of quantitative easing, with no growth over the next two years, then rising to 1.1% in 2022;
  • a negotiated Brexit deal passed through the current parliament, with tax cuts and further spending increases of 1-1.5% of GDP, growth rises to 1.5% a year in the short term; or
  • revoking Brexit under a Labour-led coalition, followed by significant tax and spending increases, might result in growth of 2% a year.

The report notes the stark change in the global economic outlook over the past year, with growth expected to slow to 2.8% in 2019, against forecasts from this time last year which predicted 3.2% growth in 2019.

In another chapter, the IFS sets out its ‘Road map for motoring taxation’, suggesting alternatives to fuel duty, which is set to disappear altogether as the government pursues its target of zero net emissions by 2050. The chapter proposes a move towards a system of road pricing where charges vary by time and location. As a possible first step towards such a system, the government could consider introducing a flat-rate tax per mile driven.

The report points out that fuel duties account for the majority of the £40bn raised each year by motoring taxes (around 5% of government revenue). However, this is being eroded by a combination of cash-terms freezes, improving fuel efficiency and the prospect of an eventual transition to cars that do not run on fossil fuels.

See IFS Green Budget 2019,

The Irish government delivered its 2020 Budget on 8 October, announcing a package of spending on public infrastructure projects and steering away from cuts to personal taxes. 

Issue: 1460
Categories: News