'Cut public spending and raise taxes'

Friday, July 10, 2009

Even eight years of tightened public spending from 2010-11 will not get the UK out of the fiscal hole it's now in so public spending will need to be cut and property taxes rise to claw back up to £25bn, according to a report from liberal think tank CentreForum.

The report 'A balancing act: fair solutions to a modern debt crisis' claimed that 'fiscal activism' was the right approach to stave off a depression, pointing out that although Gordon Brown's debt is far higher than anything Margaret Thatcher had to deal with, current interest rates make the cost of servicing that debt manageable. However the situation is precarious, the report warned, and could change quickly if a credible strategy for debt repayment is not put in place.

This would include more use of index-linked bonds, with the next government making sure it doesn't use inflation as an easy way out of the mess. There should also be a "managed decline in public spending" because the UK will not prosper as long as the public sector consumes almost half of GDP.

However, the report authors conceded that it would be neither fair nor efficient to expect spending cuts to bear the whole burden of fiscal consolidation. So there would have to be an increase in property taxes: The UK's housing boom simultaneously widened wealth inequality and destabilised the economy., the report said, and to prevent that happening again the exemption of primary residences from capital gains tax should end and councils should be allowed to raise more money from high value homes.

At the same time VAT should go up to 20 per cent and the new 50p tax band should be scrapped. And rather than spend unexpectedly high revenues from volatile taxes like stamp duty on "favoured projects", the next government should commit all revenues above predetermined limits to paying off the debt.

CentreForum's chief economist Giles Wilkes said: "Low interest rates and the threat of deflation make this crisis different to any since the War. The Labour government has been right to ignore panicked calls for fiscal restraint in a downturn. By allowing debt to expand, the government has prevented a spiralling depression, which would have damaged every household, rich and poor. So it is right that every household should help pay it back."

He added: "There has been much debate in recent weeks about the need for spending restraint, but almost no discussion of the fact that alongside this, taxes will have to rise. This is a shame. The next government will have a rare opportunity to put the nation's finances on a more stable footing and to deal with the unfairness of the current tax system.

"Unfortunately, neither the government nor the official opposition are willing to discuss how this could be done. Conservative plans to cut taxes on savings and large inheritances will do nothing to boost the economy, while potentially doing a lot to exacerbate social inequalities. And Labour's clumsy attempts to extract more money from the rich will do little or nothing to increase revenues, while potentially doing a lot to drive away wealth creators. Neither plan deserves to be implemented."