Uncomfortable truths from the IFS on public spending and tax cuts but cautious optimism on economic growth

Last week, the highly-respected Institute for Fiscal Studies produced its annual “Green Budget”: its attempt to inject some realism into the national debate on the economy ahead of the chancellor’s actual budget in March.

The document makes for uncomfortable reading in parts, particularly as we head towards another general election in which the complicity of silence on deficit reduction is likely to be as deafening as it was in 2010.

IFS borrowingDeficit reduction: significant progress, but some way to go

Starting with the deficit, the IFS’s conclusions are stark. Had the government not taken steps to increase taxes and cut spending in the years since 2008, they estimate that the deficit would have reached 10% of national income by 2018-19. Because of the estimated 16.7% permanent reduction in economic capacity caused by the crash of 2008, 98% of that deficit would be “structural” – i.e. would not be expected to reduce naturally once growth picked up:

For an economy such as the UK, this level of borrowing would have been unsustainable on an ongoing basis. Public sector net debt would have increased markedly year-on-year, likely surpassing 100% of national income before the end of the current decade, and 200% within the next two decades.

On the question of whether a reduction in tax receipts or relative increases in spending contributed most to the post-crisis deficit, the IFS are clear: while tax receipts did decline (particularly from the industries most associated with the boom – particularly financial services), it was increases in spending relative to the size of the economy which contributed most:

The biggest effect of the crisis and recession, however, was on spending as a share of national income, which increased markedly up to 2009–10. This was because the huge downward shock to the size of the economy in the crisis meant that the previously-set cash spending plans suddenly represented a much larger share of national income than had been anticipated.

While the IFS are too polite (and non-partisan) to say so, that of course was an inevitable consequence of the actions of a Labour government which believed it had abolished boom-and-bust and that tax receipts from a debt-fuelled boom would continue indefinitely.

Of course, thanks to the coalition the public finances did not continue on their “natural” path to permanent unsustainable deficits, and the IFS notes the success of deficit reduction so far, with 46% of planned tightening set to be achieved by the end of the current financial year.

On the composition of that fiscal tightening — the balance between tax cuts and spending — the IFS says this:

The composition of the planned tightening is currently heavily weighted towards spending cuts. Only 14% of the overall tightening (1.4% of national income) is planned to come from tax increases, while 71% of the overall tightening (7.2% of national income) is to come from lower than planned non-interest spending – 8% from investment spending, 14% from benefit spending and 50% from other current non-interest spending (0.8%, 1.4% and 5.0% of national income respectively).

It is also interesting to note that a whole 15% of deficit reduction will result from the coalition paying less in debt interest because of measures already taken to reduce the deficit.

While forecasts show the public finances going from deficit to surplus sometime in the next parliament, the IFS note to continuing negative effect the accumulated debt will continue to have on public finances:

Even if the forecasts do prove correct, that would still leave public sector net debt standing at nearly £1.6 trillion, or 76% of national income in 2018–19. This will constrain government policy for many more years to come, since such a high level of debt (at least relative to recent decades) involves substantial annual debt interest payments and leaves the government highly exposed to increases in interest rates.

Low pay: a challenge to all parties

The Green Budget dedicates a whole chapter to the issue of low pay, and the possible policy solutions that are on the table.

First, they summarise the coalition’s actions on the income tax personal allowance:

In April 2014, the current government will meet its commitment to raise the income tax personal allowance for under-65s to £10,000. The personal allowance will then be £2,545 higher than under the plans the government inherited, at an estimated cost of £10.7 billion per year – a substantial tax cut at any time, and even more so in an era of severe fiscal restraint. This will have taken 2.0 million people out of income tax, meaning that the 4.6 million lowest-income workers (17% of all workers) will pay no income tax.

The paper then discusses at some length the Lib Dem proposal to raise the threshold further, to around £12,500 (the equivalent of a full-time minimum-wage salary). While they note that:

On average, the workers who would gain most in percentage terms from this further increase are those in the lower-middle of the individual earnings distribution.

They also point out that because such tax cuts are by their nature not targeted:

Overall, the numbers…imply that 69% (£8.4 billion) of the £12.2 billion per year giveaway would go to working families in the top half of the income distribution, and a further 16% (£1.9 billion) would go to non-working families (mostly pensioners). Just 15% (£1.9 billion) would go to working families in the lowest-income half of the population.

They also note that there is a significant problem in those at the lower end of the income scale losing much of the benefit of such cuts because of the withdrawal of social security entitlements that accompany them. The IFS make many similar points to Centre Forum, in their recent publication on this topic.

But while the IFS can be summarised as having reservations on further increases in the personal allowance, there is no such ambivalence in their view on Labour’s proposal to reintroduce the 10p income tax rate:

In short, the reintroduction of a 10% marginal rate band would add unnecessary complexity to the income tax system. There is no plausible economic objective which could not be better and more simply achieved through further increases to the personal allowance.

Like CentreForum, the IFS are much more keen on increases in the national insurance contribution threshold, as a more cost-efficient way to help the lowest paid:

…aligning the employee NICs threshold and the personal allowance represents a better way to help the low paid than further increases in the personal allowance alone. First, there is a group of low-paid individuals who already pay no income tax, but whose tax burden can be reduced through cuts to NICs. Second, because cuts to NICs reduce taxes only on earned income, the gains for workers are larger at a given exchequer cost than the gains from increasing the personal allowance.

On the living wage, the IFS have two reservations:

…the policy also has two key problems. First, it does not seem particularly well targeted at addressing the ultimate causes of low pay – low productivity and/or exploitation by employers with substantial labour market power. Second, it may distort the behaviour of employers in ways that reduce employment and economic output, and reduce rather than increase exchequer revenue.

LVT: an idea whose time has come?

Another chapter is devoted to the issue of business rates and ideas for their possible replacement. At the very least, the IFS would like the government to look seriously at whether a land value tax should be considered:

We cannot say conclusively that the administrative hurdles to replacing business rates with an LVT could be overcome at reasonable cost. But this is such a powerful idea, and one that has been so comprehensively ignored by governments, that the case for a thorough official effort to design a workable system seems to us to be overwhelming. In particular, significant adjustment costs would be merited if the inefficient and iniquitous system of business rates could be swept away entirely and replaced by an LVT.

Economic growth: a sustainable recovery

The IFS note that economic growth over the past year has been driven in part by increases in consumer spending. However, it cautions us not to worry too much about this for two reasons: first, because the increases have come not from increases in borrowing but from reductions in saving levels, and secondly because the recovery is likely to become more broad-based this year:

…our forecast points to slightly weaker growth in the near term as consumer spending growth cools, with quarterly growth rates stepping down from 0.7–0.8% to nearer 0.6%. But as the recovery broadens out, with the contributions of business investment and exports improving, then the recovery will achieve the ‘escape velocity’ that Mark Carney is desperately seeking. Our forecast shows GDP growing by 2.6% in 2014, which would be the strongest growth for seven years, and 2.4% in 2015.

Looking at the thorny issue of the effect of fiscal consolidation on growth, the IFS throw their hat into the ring with this estimate:

…we estimate that fiscal retrenchment has reduced the level of GDP by 3.7% compared with what would have happened had there been no fiscal tightening.

IFS household debtThe IFS are also cautiously optimistic that UK households will continue to improve their long-term outlook by continuing to reduce their debt levels:

Households have been repairing their balance sheets over the past six years, but recently the pace of deleveraging has eased and the level of household debt remains high by historical standards (see Figure 4.18). Our forecast assumes that households continue to deleverage in a relatively orderly fashion, with the low interest rate environment giving them room to plot a path towards more sustainable debt levels.

Overall, then, what conclusions can we reach?

I’d say we can conclude that deficit reduction was necessary, but that it inevitably had an impact on growth rates.

But clearly the job is not done. There will be many difficult choices to be made on public spending before we reach a point at which the public finances can be called sustainable.

And we can cautiously say that the economy is recovering, and that that recovery is set to become more broad-based and investment-focused, with household finances and balance sheets continuing to improve.

You can read all of the chapters of the Green Budget here.

* Nick Thornsby is Thursday Editor of Liberal Democrat Voice and blogs here.

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30 Comments

  • It’s helpful that the IFS have published these figures in relation to the proposed further increase in the income tax allowance:
    “Overall, the numbers…imply that 69% (£8.4 billion) of the £12.2 billion per year giveaway would go to working families in the top half of the income distribution, and a further 16% (£1.9 billion) would go to non-working families (mostly pensioners). Just 15% (£1.9 billion) would go to working families in the lowest-income half of the population.”

    The party really needs to think hard before committing itself to a hugely expensive policy which would mostly benefit those on above-average earnings.

  • Adam Corlett 10th Feb '14 - 12:45pm

    I think there are a few further IFS points against current deficit reduction plans that should be considered.

    One is their continued disbelief that the proposed cuts to departmental spending are feasible. “Even with the Chancellor’s mooted £12 billion of further cuts to social security benefits, the implied cuts to public services from 2010–11 to 2018–19 would mean departments facing budget cuts of 17.1% on average. If ‘protection’ for schools, the NHS and aid spending were continued through to 2018–19, other ‘unprotected’ departments would be facing average cuts of 31.2%.” “Current plans imply that public service spending as a share of national income in 2018–19 will be back around the level it was in the late 1990s (technically, at its lowest level since at least 1948–49 from when comparable data are available), and it is far from certain that the current or a future government will have the political will to see state provision of services reduced to this extent.” They also say that because of population growth and ageing, “even if NHS spending were ‘protected’ and frozen in real terms between 2010–11 and 2018–19, real age-adjusted per capita spending on the NHS would be 9.1% lower in 2018–19 than in 2010–11.”

    That is not unrelated to the fact that, as you say, only 14% of deficit reduction is now expected to come from tax increases, even though 20% was meant to be our coalition compromise. The IFS are also concerned that projected increases in fuel duty might not go ahead (while I believe VED and tobacco revenues may also start to fall soon). If we want to deal with these issues, there may not be much money left over for tax cuts!

    The other reason for caution on gung-ho deficit reduction is that the IFS estimate the ‘outgap gap’ to be much bigger than the OBR think (5% GDP, not 2.3%). “There is considerable disagreement among independent forecasters over how much spare capacity there currently is in the economy. But the scale of the Chancellor’s fiscal consolidation plan means that even, if the most pessimistic forecasters are correct, the planned consolidation would still be sufficient to offset the estimated damage done to public borrowing by the financial crisis. If the most optimistic assessment of the amount of spare capacity in the economy is right, all spending cuts planned beyond 2014–15 could be reversed and the deficit would still be on course to return to pre-crisis trends.”

  • “While the IFS are too polite (and non-partisan) to say so, that of course was an inevitable consequence of the actions of a Labour government which believed it had abolished boom-and-bust and that tax receipts from a debt-fuelled boom would continue indefinitely.”

    With respect, I don’t think supporters of Nick Clegg are in a position to point the finger like this. What Clegg was advocating in 2008 was neither increased taxes nor decreased spending, but “big, permanent tax cuts”!

  • Adam Corlett 10th Feb '14 - 12:53pm

    I’m not especially partisan but it’s also notable how many of Labour’s plans are criticised. As well as the 10p tax rate and living wage tax break plans that Nick discusses, the IFS attack Labour’s planned corporation tax increase (and business rate changes), and raise doubts about their energy prize freeze. All electoral gimmicks rather than sound policies.

    PS In my previous comment that should read “output gap” in the last paragraph, of course, though I do like the sound of “outgap gap”

  • Frank Booth 10th Feb '14 - 1:02pm

    Complicity of silence about the deficit?????? From day one deficit reduction has been the core mission of the coalition. 16.7% permenant reduction in economic capacity because of the crash? I would like to see a similar figure for the US. 3.7% down on output without ANY fiscal consolidation sounds a very low figure to me.

    Mr Thornsby will I’m sure claim to be neutral in all this, like the FSA, but I detect a pro-coalition bias in his comments. Saying we can conclude from this that deficit reduction was necessary is a straw man argument. Who exactly has ever believed that the deficit didn’t need to come down? He also claims we can assume the recovery will become more broad based – well it would be hard for it to become more narrow based than it is right now. Let us not forget that the coalition’s plan was to eliminate the deficit inside a single parliament and they wanted to see an INCREASE in household borrowing in order to achieve this. Witness David cameron getting himself into a mess a Tory conference when he was going to speak about us all having to pay off the credit card bill. Sadly the great British public have refused to play ball.

    Mr Thornsby sounds like another of the pro-economic establishment people who have infected the Lib Dems in recent years, just as that economic establishment has shown itself to be deeply flawed.

  • “Had the government not taken steps to increase taxes and cut spending in the years since 2008, they estimate that the deficit would have reached 10% of national income by 2018-19. ”

    “For an economy such as the UK, this level of borrowing would have been unsustainable on an ongoing basis. Public sector net debt would have increased markedly year-on-year, likely surpassing 100% of national income before the end of the current decade, and 200% within the next two decades.”

    These sentences should be tattooed onto the foreheads of some people posting on earlier threads who claim that making cuts was some kind of right-wing plot by neo-liberal orange bookers.

  • Nik Porteous 10th Feb '14 - 1:15pm

    Good to see endorsement of an increased personal allowance over a reintroduced 10p tax rate, it confirms I think what most of us see as the right path – an income tax system that is simple and shelters the low paid from tax as much as possible. Establishing a relationship between annual pay on the minimum wage and annual personal tax allowance is a good policy and I can’t see a reason why all main parties could not support this.

    The sacrificed growth maybe a headline figure and one that Labour will latch onto, but I would view it as a necessary sacrifice . Growth is surely not the be all and end all, especially when said growth is still not that ‘real’, i.e. so much based on debt fuelled spending.

  • @ Frank Booth

    “Saying we can conclude from this that deficit reduction was necessary is a straw man argument. Who exactly has ever believed that the deficit didn’t need to come down?”

    Plenty of people, even those posting on Lib Dem voice. They say we could have carried on borrowing regardless, because the UK has its own currency and our debt had a long maturity profile.

    Then they say there was no need for cuts and that all the reduction could have come from raising taxes, despite knowing full well that the government has never managed to push the share of GDP taken in taxes above about 40% in recent decades.

    So effectively they are saying they would have supported a government with no concrete or feasible plans to reduce the deficit.

    This is not a “straw man” argument, because there are plenty of people who are willing to believe such silly ideas because the realities of the situation facing the UK in 2010 are still too hard for them to stomach and they prefer to retreat into denial.

  • However the deficit is tackled, I think everyone acknowledges that future growth is the key to pulling the economy back on track?
    So I ask myself, where this ‘new’, money has come from, to create this rather unpredicted, and unexpected, economic growth?
    The only two new sources of money I can think of are the compensation payouts to people who have had PPI mis-selling claims. And secondly, since the Cyprus bail-in of people with serious money in bank accounts, that ‘serious money’, ( Russian, Hong Kong, Indian, Chinese etc), has got very ‘twitchy’, and has started to look for a realistic safe havens from the clutches of governments looking to use the bank accounts of depositors as a source of future bail out funds. One of those safe havens has been the London property market. But are these sources of new money evidence of real growth?
    This new money (IMO), has created an unexpected but welcome, uplift of economic growth. And it WILL undoubtedly, cascade outwards into the wider economy. BUT, is this spike in consumerism, a valid measure of a sustainable growth that comes from real economic investment? I think we are going to find out soon. And I think George Osborne, and Danny Alexander, already know the answer, but have their fingers crossed, hoping that ‘finding out soon’, is on the other side of the 2015 election .

  • “Good to see endorsement of an increased personal allowance over a reintroduced 10p tax rate …”

    The IFS doesn’t endorse increasing the personal allowance. On the contrary, the reports says “There are better ways to help the low paid via the tax and benefit system than through further increases in the income tax personal allowance.” (Though it does add that a 10p band would be even less well targeted.)

    As far as the tax system goes, the IFS’s preferred way of helping the low-paid is raising the National Insurance threshold. But as Brian Robson points out, the conclusion is that there are advantages to using in-work benefits rather than taxation:
    “If the key objective is to help the low paid, though, there are significant advantages to using in-work benefits rather than direct taxes. Any increases in generosity are focused on that group, rather than benefiting almost everyone who pays direct tax. Indeed, many of the lowest paid may gain relatively little from tax cuts if they lead to loss of means-tested benefits.”

  • Eddie Sammon 10th Feb '14 - 1:58pm

    This report resonated with me because I have felt for a while that there is a disconnect between reality and the national conversation.

    To keep it short: I think we should call for significant tax rises, as well as cuts.

    Regarding Land Value Taxation: I have yet to see an argument why this is better than a net asset tax.

  • Nick Thornsby Nick Thornsby 10th Feb '14 - 2:26pm

    @ Chris

    “With respect, I don’t think supporters of Nick Clegg are in a position to point the finger like this. What Clegg was advocating in 2008 was neither increased taxes nor decreased spending, but “big, permanent tax cuts”!”

    What makes you think deficit reduction and tax cuts for those on lower incomes are mutually exclusive? Surely the coalition has proved that one can do exactly that?

  • Nick

    I think you must already realise this, but in order to reduce the deficit you must either decrease overall expenditure or increase overall taxes, or both. So you can surely understand my point about what Clegg was saying in 2008.

    And evidently you do understand – because you quote the IFS to that effect in the article above – that raising the income tax allowance isn’t “a tax cut for those on lower incomes”: it’s a tax cut for all basic rate payers, in which the bulk of the money goes to those on middle and higher incomes! Is there any chance at all that people will stop misrepresenting this policy?

  • RC: I’m unaware of anyone arguing that ‘we could have carried on borrowing regardless’ or that ‘ there was no need for cuts and that all the reduction could have come from raising taxes’.
    Yours is a gross mischaracterisation of the arguments of critics of Government policy, who in fact are saying that the deficit could have been brought down MORE QUICKLY by the Government maintaining investment in the economy at the point, three or four years ago, when private investment was at it’s lowest. Indeed, post- FDR, this might be regarded as the DUTY of a sensible Government, and Liberal Democrat policy before the election (which you presumably supported?) allowed for it.
    However, it seems to me that George Osborne and most of the Conservative Ministers have a pathological hatred of ALL state spending (since they, the selfish wealthy, pay proportionately more towards it. Unless of course, it feathers the nests of their own supporters and donors in the private sector). They cynically regarded the crisis as a huge opportunity to move more quickly than they had ever hoped possible to slash the size of state spending, and attack the living standards of public sector employees.
    Unfortunately, Lib Dem Ministers were either (a) fully complicit in adopting this ideologically-Conservative economic policy (perhaps some were millionaires themselves?), or (b) allowed themselves to be scared into adopting it by overblown apocalyptic warnings by Mervyn King and others in the days immediately after the last election. Or maybe even (c) some of them were arguing for a more sensible policy, and were simply outvoted in Cabinet by the Tories?
    Whatever happened, we adopted the Tory policy wholesale, and it was a disaster. Growth fell from about 2% to nothing at all, and bumped along the bottom dipping in and out of recession for years. Does it not seem quite possible to you that, as in many other countries, the recovery would have been quicker if the stuffing had not been knocked out of the public sector? While spending and tax rates may have been marginally higher, tax receipts would have benefitted from the economic multiplier as public employees spent their wages in the PRIVATE sector, and private businesses passed that on to their employees to spend again, ad infinitum. This would have had the benefit of helping to maintain private demand, and helping to prevent the extra three or four years of stagnation we have experienced. And tax receipts in that counter-scenario may well have been high enough to MORE THAN COMPENSATE for the marginal cost of maintaining the most important spending, meaning that the DEFICIT WOULD HAVE COME DOWN MORE QUICKLY!
    No-one, so far as I am aware, is arguing that retrenchment was completely unnecessary, or that it should all have been achieved with higher taxes. But we ARE arguing that the balance was (and still remains, despite some admirable Lib Dem-led initiatives at public investment in the second half of this Parliament) fundamentally wrong, driven by the Tories’ ideological anti-public-sector attitudes. And we DO think that further efforts to reduce the deficit should entail a better BALANCE between spending and taxes, and STIMULATING GROWTH in order to increase tax receipts.

  • Toby Fenwick 10th Feb '14 - 3:03pm

    Nick,

    Thanks for a very useful post. I urge everyone interested in this policy area to read Adam Corlett’s excellent “Making Allowances” paper (http://www.centreforum.org/assets/pubs/making-allowances.pdf), in which he shows that if we’re going have a large tax cut (itself a contestable notion at a time we’re still borrowing £300m / day), that changes to NI are much more progressive than PA increases. And importantly, Adam suggests a number of routes by which we could ensure that these changes were fiscally neutral whilst benefiting the lower paid.

    Personally, I’d like to merge employee’s NI and income tax entirely, and remove the distinctly unprogressive kink for high earners which sees NI fall from 12% to 2% in the higher tax bracket. Either move to a system which is progressive, or even one where there is a single rate of NI for all earners (it would be something like 8 or 9% fiscally neutral, IIRC).

  • Toby Fenwick 10th Feb '14 - 3:05pm

    @ Eddie: LVT is not better than a net asset tax, though it is easier to compute as physical holdings are physical. But applied as a wealth tax in that way, it simply incentivises the wealthy to have their wealth in forms other than land.

  • Nick Thornsby Nick Thornsby 10th Feb '14 - 3:24pm

    Chris,

    I am aware of that, but one can have permanent tax cuts for some while increasing taxes for others. As long as the latter raises more than the cost of the former the deficit will fall. So why is there anything unclear or incoherent about Clegg’s statement when seen alongside a commitment to deficit reduction?

  • Nick

    Here’s what I wrote again:
    “What Clegg was advocating in 2008 was neither increased taxes nor decreased spending, but “big, permanent tax cuts”!

  • Eddie Sammon 10th Feb '14 - 3:37pm

    Toby, I just think the richest should pay the most tax and in the days of tech billionaires and digital property rights Land Value Taxation looks like it belongs in the 19th century. :)

    I don’t like high taxes, I’m just saying I think there is scope to increase them. The banks are still not out of danger, so I think we need to start treating public money like gold dust and prioritise economics above politics.

  • Eddie Sammon 10th Feb ’14 – 1:58pm
    ” …. … a disconnect between reality and the national conversation. ”

    Or at the very least a departure from the English language ? :-)

  • Eddie Sammon 10th Feb '14 - 3:59pm

    Lol, John, I was struggling to come up with a term that wouldn’t offend anyone!

  • Bill le Breton 10th Feb '14 - 6:22pm

    Adam Corlett (12.45pm)above writes, “If the most optimistic assessment of the amount of spare capacity in the economy is right, all spending cuts planned beyond 2014–15 could be reversed and the deficit would still be on course to return to pre-crisis trends.”

    Exactly the point I made in this piece for LDV back in October 2012 – two autumn statements ago http://www.libdemvoice.org/opinion-mind-the-gap-a-sceptical-view-of-the-need-for-cuts-30919.html

    There is even better news (unless I am disappointed on Wednesday). Mark Carney is ‘feeling his way’ to a practical assessment of the size of the output gap, and not taking the OBR’s estimate at face value. So if IFS’ 5% is right (and that is in line with Capital Economics and Oxford Consulting) Carney will not tighten monetary policy until that capacity has been used.

    Of course that was another reason why the SLF amendment at Glasgow which sought a lower target for unemployment was right. Who knows, Carney on Wednesday may give his backing to that amendment. Pity the leadership didn’t when they had the chance to ‘set the pace’.

    There is also some really good stuff from Wren-Lewis back in April last year using the IMF WEO report to compare the pace of deficit reduction and point to those countries that had a shorter recession . http://mainlymacro.blogspot.co.uk/2013/04/an-understandable-mistake.html

    The Coalition’s expedited consolidation of the deficit, by my reckoning, has increased the national debt by a quarter of a trillion – quite a legacy for our grandchildren.

  • Nick

    On the subject of what the Lib Dems were saying about deficit reduction in 2008, you may like to refresh your memory by reading this article by Danny Alexander:
    http://www.libdemvoice.org/danny-alexander-writes-the-lib-dems-taxcutting-agenda-3673.html

    Among nine paragraphs about how the Lib Dems will find the money for “big tax cuts” and divert spending towards the party’s priority areas, I spotted half a sentence about deficit reduction, describing what would happen in the hypothetical event of there being any spare money left after “much of the money” identified as wasteful spending had been reallocated to Lib Dem priorities:
    “Sadly, some may have to go to filling up the black hole in the government finances that Labour’s economic mismanagement has created, but the vast majority of the “spare” money will go straight back to ordinary people and families.”

    So, it seems, there would be no deficit reduction at all if Lib Dem spending priorities required all that money saved from “wasteful spending”. But if there was a bit left over, a relatively small amount would be used to reduce the deficit, because the “vast majority” of the spare money would go into tax cuts!

  • Jonathan Brown 10th Feb '14 - 11:42pm

    I don’t really understand why we seem to be prioritising another raise in the tax threshold rather than a raise in the NIC threshold. They’re really very similar, but the latter is much better targetted at the people who most need it.

    I also think we should merge NIC and income tax, although I’ve been told that it would for some reason be very complicated to do.

  • “I don’t really understand why we seem to be prioritising another raise in the tax threshold rather than a raise in the NIC threshold. They’re really very similar, but the latter is much better targetted at the people who most need it.”

    The reason is perfectly obvious. The party thinks more people will vote for it if it promises to raise the allowance.

    As the IFS says: “If the key objective is to help the low paid, though, there are significant advantages to using in-work benefits rather than direct taxes.”

    Clearly the key objective is not to help the low-paid, but to offer a tax cut to middle-class voters in marginal constituencies – while gulling party activists with the claim that this is a “tax cut for those on lower incomes”. The really tragic thing is that in most of those marginal constiuencies the main opposition is the Tories, and they will be offering precisely the same thing.

    Did the great minds advising Nick Clegg really not anticipate the fact that the Tories would be happy to appropriate this policy themselves? A cynic might say that was the whole idea.

  • We can hope that those in the party who believe in the increase in Income Tax allowance will look at this report and recognise that bringing National Insurance thresholds in line with Income Tax allowances helps the poor more and does not help those with unearned income as with the tax allowance and that they will propose changing our policy accordingly.

    With regard to the structural deficit I note that the IFS state that if there had been no economic crisis in 2008 the deficit would have been “falling to 1.3% of national income by 2012-13. This level of borrowing would have been sustainable for the UK in the medium term,” Their chart Panel A Revenues and spending show no large increase in spending after 2010. I would be interested in trying to understand how anyone can determine that there were structural changes in the economy that led to a huge structural deficit but if there had been no crash there wouldn’t have been any structural deficit. As Adan Corlett states “there is considerable disagreement among independent forecasters over how much spare capacity there currently is in the economy.”

  • Alex Sabine 13th Feb '14 - 1:45pm

    @ David Pollard
    ‘I suppose it is still possible to argue that Labour should have contained the deficit as the economy was growing…’

    With masterly understatement, yes indeed it is! I find it hard to see how it is possible to argue the contrary.

    Indeed, given the record period of uninterrupted economic growth that Labour never tired of boasting about, the appropriate fiscal stance would have been sizeable year-on-year fiscal surpluses similar to those in the Scandinavian countries, Australia, New Zealand, Canada and other better run countries.

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    It would be interesting to see what would happen if William took legal action against his university to refund his tuition fees, because he clearly...