Be afraid. Be very afraid. That was the message from the Institute for Fiscal Studies as it dissected the tax and benefit proposals of what are for now the three main Westminster parties.
The IFS said the Conservatives, Labour and the Liberal Democrats were as one in trying to hoodwink voters. Despite what is being said on the campaign trail, there is no magic money tree for the politicians to shake. Promises now will be followed by hard choices later.
But that’s modern politics. Being upfront with the voters about the cuts in social security that will be needed to finance tax cuts is not seen as an election-winning strategy. Far better to have a big crackdown on tax avoidance that will raise £4.6bn (Conservatives), £6.7bn (Labour) or £9.7bn (Lib Dems).
The IFS was suitably dismissive about these claims, which it said had been plucked from thin air to make the parties sums add up. It said: “All these parties seem to have a desire to raise tax revenue in vaguely defined, opaque and apparently painless ways. In may cases the proposals would lead to unnecessary increases in complexity and inefficiency in the tax system.”
The thinktank was even-handed in the way it took both the Conservatives’ and Labour’s plans apart. The two big tax proposals for the Conservatives are to raise by 2020 the personal tax allowance to £12,500 and to lift the 40% income tax threshold to £50,000: both more than the expected rate of inflation over the next five years.
Britain’s low-wage economy means that almost half of adults (44%) earn too little to pay income tax. The big beneficiaries of the policy will be comfortably off two-earner couples.
Similarly, raising the 40% threshold helps those on higher incomes. The IFS calculates that someone earning £50,000 a year will gain around £8 a week from the change.
But David Cameron has been far less specific about how he intends to make significant savings from Britain’s social security budget. So far, the Conservatives have specified just over £1bn of the £12bn of cuts they intend to make in the first two years of the next parliament, through a freezing of working-age benefits, a reduction in the benefit cap from £26,000 to £23,000, and the removal of housing benefit from 18-21-year-olds claiming jobseekeer’s allowance. The IFS shows that these changes, unsurprisingly, hurt the poor most.
Given the lack of detail from the Conservatives, the IFS also has a stab at identifying how Cameron could make his welfare savings. The ringfencing of pensioner benefits means that £90bn of the £225bn social security budget is off-limits, and that the Conservatives would have to save one pound in every ten currently spent on unprotected services. If they did so, it would take spending in these areas back to levels last seen in 1990.
The money could be saved, according to the IFS, by cuts in means-tested benefits for children (£5bn), the abolition of child benefit (£5bn), cutting housing benefit by 10% (£2.5bn) and the taxation of disability benefits (£2.5bn). These cuts would leave already poor families even poorer.
Labour’s tough rhetoric, according to the IFS, is not matched by its proposals. Capping increases in child benefit to 1% for 2015-16 and 2016-17 would raise nothing at all, since the 2015-16 increase has already been paid, and the inflation rate for the 2016-17 increase is expected to be 0.2%. Taking the winter fuel allowance away from the richest pensioners will raise £100m.
Ed Miliband’s plan to pay for a new 10p starting rate of tax would be worth 50 pence a week while jacking the top rate of tax up from 45% to 50% will net only £100m unless Labour can make good on its promises to tackle tax avoidance.
Property taxes? Again it is a case of a plague on both your houses. The IFS says it is hard to see a good economic or social rationale for the Conservative plan to increase the inheritance tax threshold. Labour’s promise of a stamp duty holiday for first-time buyers will lead to higher house prices.
With some exasperation, the IFS wonders why Labour and the Liberal Democrats are calling for the introduction of a mansion tax when a much better solution would be the long overdue reform of council tax.
The reason is self-evident. There are no votes in it.
