12 November 2014updated 05 Oct 2023 8:52am

Could we balance the budget by just increasing taxes?

It is difficult to make £48 billion in spending cuts and maintain a belief in a just society. Could we raise taxes instead?

By Harry Lambert

(Photo By How bare will government be if Osborne has to cut another A£48bn in spending? Photo: Getty.)

This piece was originally published on our new elections site, May2015.com.

The next government has to make £48 billion in savings, the FT reported on Monday. Given Britain is now halfway through nine years of planned austerity, the paper is running a week-long series on the deficit.

But how, they ask, can the government do it? The paper lets you play Chancellor, offering you 26 things the government currently covers that you could cut. Together they add up to £55 billion in savings. You just have to choose enough of them to get to £48 billion. It seems simple enough.

If you’re struggling, and find yourself unable to wield the axe enough, they also suggest ten tax rises you could introduce. These add up to £13 billion. They are designed to get you over the line after you’ve slashed enough services.

Implicit in all of this is the idea you have to cut spending.

Implicit in all of this is the idea you have to cut spending. If you reject all the spending cuts, and only raise taxes, the FT’s options leave you with a 35 billion black hole.

But why do we have to cut spending? Why can’t we just all put more money into the pot?

First, try making £48 billion in cuts and maintaining a belief in a more just society. We’ve sorted the FT’s options into three levels of cuts: significant (£3bn+); mid-level (£1bn-3bn) and all but pointless (<£1bn).

Significant

• Scrap plans to build HS2 (save £8.1bn)
• Cut 5.75% from the NHS budget (£6.1bn)
• Abolish the department of Culture Media and Sport (£5.6bn)
• Cut resource spending on Scotland, Wales and N Ireland by 10 per cent (£5.3bn)
• Axe a third of transport spending for London (£3.6bn)
• Freeze benefits for working-age population for 2 years (£3.2bn)
• Scrap Trident successor (£3.2bn)
• Freeze the defence budget (£3.0bn)

Mid-level

• Cut 5 per cent from the school budget (£2.6bn)
• Cut 10 per cent from the housing benefit bill (£2.4bn)
• Scrap the winter fuel allowance (£2.1bn)
• Halve spending on NHS dentistry (£1.4bn)
• Charge £10 for GP consultations, excluding the most vulnerable (£1.2bn)
• Reduce the army by another quarter in size (£1.1bn)
• Scrap concessionary fares (£1.0bn)
• Slash £1bn in support for keeping 16 to 19 year-olds in education or training (£1.0bn)

Pointless

• Increase the charge for prescriptions and the 12 month payment card, and reduce the percentage of drugs dispensed free of charge (£0.9bn)
• Halve spending on road maintenance and improvements (£0.9bn)
• Scrap free TV licenses for the over 75s (£0.6bn)
• Cut 10 per cent from the Border Force’s budget (£0.6bn)
• Cut 5 per cent from international development (£0.5bn)
• Cut 25% from the criminal and civil legal aid fund (£0.4bn)
• Scrap the Christmas bonus for the poorly paid (£0.2bn)
• Lower the benefit cap from £26,000 to £23,000 (£0.1bn)
• Abolish the UK Statistical Authority (£0.1bn)
• Cut spending on law courts by 25% (£0.1bn)

If you decided to cut the last ten things on the list – which we term the “all-but-pointless” cuts – you would save just £4.4bn, less than 10 per cent of all the cuts you need to make.

So let’s forget those, because we would either be crippling the most vulnerable (pensioners, the poorly paid, those on benefits) or doing things like abolishing the Statistics Authority, which would be like getting rid of all the calculators in the Treasury.

If we’re going to get to £48 billion in cuts, we need to slash some big projects and budgets. We could get 80 per cent of the way there if we just made all the significant cuts that the FT offer us.

Abolishing the Statistics Authority would be like getting rid of all the calculators in the Treasury.

So who wants to scrap HS2? Or 6 per cent of the NHS budget? Abolishing the DCMS sounds plausible – the department is only twenty years old. But doing so would “withdraw most funding” from the country’s cultural institutions as well as “400 arts organisations”, we’re told.

Saving £5 billion by handing devolved bodies less cash seems vaguely acceptable, but it’s unlikely to win back the 45 per cent of Scotland who tried to secede in September, or heal the divide between working-class Welsh communities and Westminster.

Scrapping Trident and freezing the defence budget offers a simple route, but doing so would demand a new approach to international relations. We would need to forget foreign interventions and possibly resign our seat on the UN Security Council.

That may be an acceptable price for the pacifist, but these measures would only save £6 billion – less than 15 per cent of the cuts we need.

In short, we need tax rises.

The FT offers us a route to £13 billion through tax – but £9 billion of that would come from two fairly regressive measures: increasing VAT and increasing the basic rate of income tax.

Scrapping Trident and freezing the defence budget offers a simple if inadequate route for the pacifist.

More progressive options to raise money, like reintroducing the 50p tax rate, are not options. In fairness to the FT, earlier this year the IFS estimated that doing so would likely raise very little, despite Labour’s claims to the contrary.

But how, then, can we get to £48 billion? There are three main sources of tax for the Treasury: income tax, National Insurance and VAT. Together they account for nearly two-thirds of all taxes.

Fuel, tobacco and alcohol duties – so often leant up by successive Chancellors in need of cash – together bring in £48 billion: as much as we need to raise. We need to increase these duties by 100 per cent rather than 1 per cent, but doubling fuel duties would increase the cost of driving by nearly 50 per cent (fuel duty is 45 per cent of the cost of petrol).

Doubling the duty on tobacco and alcohol would scarcely be popular either.

Instead, the government could try and make more out of capital gains, inheritance and stamp duty – taxes predominantly paid by the richer part of society. But again, these progressive measures bring in only £16 billion; they would need to triple to plug the deficit.

We can’t save spending by just relying on the rich. Britain has to make a choice.

Corporation tax offers another route, but at £44 billion, it would need to double. Some combination of these measures – higher duties, more aggressive taxes on wealth, corporation taxes – could get us close to £48 billion, but there is no guarantee higher rates will mean higher revenues.

If rates become punitive, multinational companies and the wealthy could leave the UK and work elsewhere.

We could nevertheless go this route, but we may have to make a bolder, bigger choice. If voters don’t want to make the swingeing cuts required to keep the debt in check, we need to raise the tax rates that most people pay: income tax, national insurance and VAT. We can’t save spending by just relying on the rich.

Britain has to make a choice. The demands of the deficit could make us a meaner, smaller state, or be an opportunity to prove a just society sacrifices its extra pounds to sustain a more generous one.