George Osborne: We don't need to raise taxes to beat deficit

Chancellor says he suspects Labour would plan "big tax increases" if they regain power in 2015

George Osborne at the House of Commons Treasury Committee (PA)

The Government's economic plans can be achieved without further tax rises following the general election, Chancellor George Osborne said today.

In comments which foreshadow one of the main political battlegrounds on which the election is likely to be fought, the Chancellor added that he suspected Labour of planning “big tax increases” if they regain power in the 2015 poll.

Respected economic think tank the Institute for Fiscal Studies (IFS) last month warned that Mr Osborne would have to raise taxes by £6 billion after the election if he was to keep to his existing rule of financing 80 per cent of the Government's deficit reduction programme from cuts and 20 per cent from tax hikes.

But Mr Osborne told the House of Commons Treasury Committee that the 80/20 split, announced when the coalition came to power in 2010, was only ever a “guide” rather than a firm commitment.

Decisions in this year's Budget and Spending Review mean that that ratio is likely to be around 85/15 in the years after the election, according to the IFS analysis.

Mr Osborne said that, while the coalition had agreed a path towards reducing the deficit, the Conservative and Liberal Democrat sides of the Government have not signed up to a collective position on the exact mix of cuts and tax rises beyond 2015/16.

He told the Committee: “The further consolidation after 2015/16 is built into the tables as a spending reduction.

“I am clear that tax increases are not required to achieve this. It can be achieved with spending reductions.”

Mr Osborne said he was not sure what Labour's tax and spend policies would be at the election, following Ed Miliband's recent announcement that he would stick to the coalition's plans for 2015/16.

“I'm not sure whether they would do big tax increases,” the Chancellor told the Committee. “I suspect they would, but that is for them to explain.”

Mr Osborne said last month's spending review set out precise plans for 2015/16, but made clear that "further consolidation" would be needed in 2016/17 and 2017/18 as the Government continues its drive to eliminate the UK's national deficit.

Any parties which commit themselves to a similar path of deficit reduction will have to set out how they would manage it, he said.

And he added: "I think it can be achieved by spending consolidation."

Following Mr Miliband's decision to stick to the 2015/16 plans, the Chancellor suggested that "opposition to what I am doing in the economy is crumbling".

Mr Osborne declined to set a target for public spending as a proportion of GDP, which currently stands at 44.4 per cent and is due to fall to 40.5 per cent by 2017.

But he said that any country which allowed the level to rise "sharply" above 40% had historically got itself into trouble, and described the level of almost 48 per cent which he inherited from Labour as "totally unsustainable".

Asked whether he saw any scope for tax cuts following the election, Mr Osborne described himself as a "low-tax Conservative", but said that any reductions must be "sustainable".

Mr Osborne defended the protection given to spending on the NHS, schools, overseas aid and the state pension in the spending review, which has forced other departments to bear the brunt of the squeeze.

He confirmed that Business Secretary Vince Cable and Defence Secretary Philip Hammond had attempted to ease the burden of cuts on their departments by transferring responsibility for medical research and training and Army medicine into the health budget.

But he said he rejected this proposal.

And he defended the "ringfence" around protected spending areas as "a political expression of what the Government wishes to achieve and the support it wants to give to society".

He said he was "proud" of the commitment to keep aid spending at 0.7 per cent of GDP, and did not believe that it had a significant impact on the money available to other departments.

And he said it was "not unreasonable" to increase spending on the NHS in real terms at a time when the population was ageing.

The Government intends to "live by its commitment" to pensioners to protect the value of their state pension with a "triple lock", said the Chancellor.

But he made clear that the state pension age could rise beyond 67 in the future, as a result of a mechanism built into the Pensions Bill introducing regular reviews of the impact of increasing life expectancy.

Mr Osborne insisted his Help to Buy scheme providing state subsidies for mortgages, announced in the Budget in March, was fuelling a new housing price bubble.

He stressed that it was a temporary, time-limited programme that would end after three years.

"The purpose of this is to repair an impaired mortgage market that is clearly not functioning properly," he said. "I don't think the situation at the moment looks like an asset price bubble."

PA