higher borrowing and higher debt – by finding additional social security cuts or raising taxes. But again there are few easy answers. Finding an additional £12 billion per year of


social security cuts – as the Conservatives have suggested – would be roughly equivalent to freezing all benefits and tax credits other than state pensions for all five years of the next parliament. This would cut spending by £13 billion and take an average of £800 a year (in today’s terms) from 16 million families. To cut spending on this scale while protecting pensioners entirely would require more severe cuts to working-age benefits. So far the Conservatives have proposed freezing most working-age benefits for two years; even if this was extended to five years, this would reduce spending by only £6.9 billion. And the revenue raised from other potential cuts in spending suggested by the Conservatives and Labour – withdrawing winter fuel payments from higher- and additional-rate taxpayers, cutting housing benefit for young people, reducing the benefit cap, and increasing child benefit by one per cent for a further year – would pale in comparison. So far there has been much less discussion


among politicians of tax increases than of benefit cuts. But the first year after each of the last five elections has seen the announcement of net tax rises of at least £5 billion per year in today’s terms: this is approximately equivalent to a one percentage point rise in all rates of income tax, or in all employee and self-employed National Insurance contribution (NIC) rates, or in the main rate of VAT. All the main parties have suggested they


would like ‘the rich’ to bear their ‘fair share’ of any additional fiscal adjustment. Tax revenues are already highly concentrated – for example just three per cent of the adult population already pay half of all income tax. Though there is genuinely large uncertainty, our best estimate suggests


that there is little scope to raise large additional sums in income tax from the very highest-income individuals by raising their marginal tax rates (because they are likely to respond in ways which reduce the yield to the Exchequer). Instead a government looking to raise more tax revenue from the very well off might look at extending the reach of inheritance tax or capital gains tax, perhaps abolishing some existing reliefs. Property tax is an area in need of reform, and is also an area that politicians have mentioned in the context of raising more from the ‘better off’. Rather than introducing a separate ‘mansion tax’ as Labour and the Liberal Democrats propose, the deficient council tax system could be brought up to date and refocused on higher-value properties. Further cuts to income tax relief on pension contributions are probably best avoided, as this relief exists precisely because pension income is taxed later when people receive it in retirement; but there are subsidies for pension saving that ought to be reduced, and this could potentially raise substantial revenue. In summary, it is difficult to predict the


evolution of the state and the public finances in the years to come. As ever, of course, it depends crucially on the performance of the economy. In addition, though, the main parties differ substantially going into the election in terms of the levels of borrowing that their fiscal rules would allow; and they have only scratched the surface in laying out the specifics of what they will do. n


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Robert Joyce is a Senior Research Economist at the Institute for Fiscal Studies. His main research interests relate to income distribution and the design and effects of the tax and benefit system. Email robert_j@ifs.org.uk


The IFS Green Budget 2015, in association with ICAEW and funded by the Nuffield Foundation, is available at: www.ifs.org.uk/publications/7530


SOCIETY NOW SPRING 2015 19


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