Darling ‘should increase tax by 2p’
The chancellor has been urged to raise income tax by two pence in order to plug a £8 billion hole looming in the economy.
The Institute for Fiscal Studies (IFS) thinktank warns the Treasury is on course to break its own “fiscal rules” and it would be “prudent” for Alistair Darling to raise taxes in his first Budget this March.
However, it concedes the government is unlikely to do this because of Labour’s “current political difficulties”.
The thinktank notes: “The government is likely to argue that further bad news on the public finances will only be temporary and that fiscal policy should support monetary policy as the economy slows this year.
“However, recent experience suggests that ‘temporary’ problems in the financial sector can have a bigger and more persistent effect on the public finances than the Treasury initially expects.”
The IFS has history of prescience on economic trends, and the Treasury of belatedly enacting its recommendations.
In its annual ‘green Budget’, compiled with Morgan Stanley, the IFS warns the government risks breaking the “golden role” set by Gordon Brown of meeting spending with tax revenues.
The Treasury achieved this in the ten years to 2006 but the IFS warns the next economic cycle is set to be more turbulent.
The IFS states: “We expect the government to have to borrow more than £40 billion this year, next year and in 2009-10. We expect public sector net debt to hit the government’s ceiling of 40 per cent of national income in 2009-10 and to rise to 41.2 per cent by 2012-13. The government would also break its ‘golden rule’ over the new economic cycle”.
IFS deputy director Carl Emmerson concluded the golden rule is “more likely to be missed than hit”.
Shadow chancellor George Osborne said: “Today’s damning and independent report by the respected IFS is startling evidence of just how completely Gordon Brown failed to prepare the British economy.
“While our competitors can use their surpluses to guard against turbulence, we borrowed in a boom and have no room for manoeuvre.”
IFS warns any decision to nationalise Northern Rock would exacerbate these trends, although effects would be temporary as the government could then sell off the bank’s mortgage books.
Putting Northern Rock on the public sector’s books would increase the national debt by £100 billion, equating to seven per cent of GDP.
The IFS also criticised the government’s “shambolic” reform of capital gains tax. The so-called entrepreneur’s relief will make the system more complex, it warned.
It also criticised the government’s controversial decision to stage public sector pay awards, warning savings will be modest and on-off, do little to fight inflation and undermine the credibility of the pay review body process.
