Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

Comment: Whoever wins, taxes are going to have to rise

Wednesday 09 April 1997 23:02 BST
Comments

It couldn't be any plainer. As sure as eggs is eggs, whichever of the two main parties forms the next government, it would have to raise taxes or cut spending more than planned to keep borrowing to the "golden rule" level to which both parties have committed themselves.

That rule says the government will borrow no more than it would need to finance investment, and implies a deficit of around 1 per cent of GDP over time. With an underlying deficit of 2-2.5 per cent of GDP, this implies a fiscal tightening of pounds 7-pounds 10bn.

What's more, as the Institute for Fiscal Studies made clear in its analysis yesterday, to meet the existing spending targets would buck the trend of 80 years of history. Government spending just does not grow that slowly in a modern economy, and the current plans are, frankly, incredible.

If taxes do not rise more than planned - and it is worth recalling that big tax increases via petrol and tobacco duties, higher air passenger duty, and a crackdown on tax evasion are already on the cards - it would mark the end of the welfare state as we know it. We will be topping up privately our pensions, healthcare, and spending on our children's education.

There are two conclusions the financial markets should draw from the IFS's sobering analysis. One, taxes will go up quite steeply after the election - not immediately, but at some point during the next parliament. When it comes to the crunch and voters see their beloved NHS being run down, and the economy turns down so government borrowing starts to rise again, then we will get a tax-raising budget.

The second conclusion is that neither party is likely to be as tough as it pretends on borrowing, and the PSBR will not fall to zero by the turn of the century. Although there will need to be some reduction in the underlying structural deficit, neither Labour nor the Conservatives would struggle to eliminate it in practice.

None of this is the stuff of feelgood, so it is no surprise that the political parties themselves have not been spelling out the implications. But what is really odd about the election debate is how few people have cottoned on to how low UK taxes are by international standards, until the IFS pointed it out yesterday. Although government borrowing is too high, we have plenty of scope to close the gap and fund a bit more expenditure by paying more tax. After what happened to Neil Kinnock and John Smith at the time of the last election, nobody, apart from maybe Paddy Ashdown, is going to admit this. Almost everyone, it seems is fixated by the totem of taxcutting - and look at the hole that's got us into.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in