Tax cuts of only pounds 2-3bn predicted

Green budget: Influential forecast says the Chancellor has room for manoeuvre but says jury is out on plans for public spending cuts


Economics Editor

The 1995 budget will mark a return to tax cuts but they will be on a modest scale of pounds 2bn-pounds 3bn, according to the influential "green budget" presented by the Institute for Fiscal Studies and Goldman Sachs. Such a reduction would be consistent with a public sector borrowing requirement in 1996/7 of pounds 17bn, pounds 4bn higher than the level projected by the Treasury in the 1994 budget.

A combination of spending cuts, offsetting tax rises and toleration of an increase in the PSBR would allow cuts in taxation which would be concentrated on income tax. "Such a budget would not offend against the principles of sound public finance we have advocated in the past," the report said.

However, the authors of the report warned that they had "considerable doubts" about the ability of the Government to cut spending in real terms in 1995/96. "The jury is still out on whether the tight spending plans for the future will be realised, whether plans will be relaxed in the run-up to the election or whether cash plans will be tightened to account for small overshoots in 1994/95 and 1995/96."

Presenting the 1995 "green budget" the IFS Director, Andrew Dilnot, said that pounds 3bn would pay for a cut in the basic rate of tax from 25 to 23.5 per cent. An increase of pounds 450 in allowances was much more equitable but lacked the same punch. A more arresting package, he suggested, might be to achieve a basic rate of 20 per cent in one fell swoop. This would be achieved by raising the current lower band in which taxable income is taxed at 20 per cent from pounds 3,200 to pounds 11,225.

At that level, there would be more taxpayers paying at 20 per cent than at 25 per cent. However, this would involve limiting the relief on personal allowances to 20 per cent, just as the relief on the married couple's allowance has been reduced to 15 per cent.

Mr Dilnot thought that a windfall tax on the utilities was not likely but that the Government might use the threat of one to get regulators to push for more rebates for customers. "The best solution to monopoly abuses by the utility companies would be tighter regulation rather than the Government appropriating these monopoly profits through taxation," the report said.

Outright abolition of stamp duty on the house purchase was less likely than an increase in its threshold from pounds 60,000 to pounds 100,000, Mr Dilnot said. He also questioned current taxation on drinks, which he described as "pretty bizarre." Mr Dilnot said there was a case for reducing taxes on spirits since the increase in demand might actually boost revenue. Taxes on beer could, however, safely be raised to raise receipts.

Despite the energetic lobbying of the Institute of Directors for abolition of capital gains tax, this did not figure in the green budget. According to Mr Dilnot, CGT is "a finger in the dyke" necessary to prevent the conversion of income tax into capital gains. Its abolition would lead to substantial tax avoidance.

The trajectory for public borrowing laid out by the green budget would be consistent with a deficit of 2.1 per cent next year and eventual near balance by 1998/9. According to Gavyn Davies of Goldman Sachs this highlighted the potential for a relaxation of budgetary policy under a Labour government.

The leeway arose because Gordon Brown's "golden rule" of borrowing no higher than investment was less restrictive than the Government's plan to restore balance to the public finances before the end of the decade. By permitting a PSBR of around 1.5 to 2.5 per cent of GDP, this created "considerable fiscal scope" for Labour, amounting to pounds 12bn in 1997/8 and as much as pounds 18bn in 1998/9.

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