Tax rises coming whoever wins the election, leading economists warn

Leading economists today warned that taxes could rise by even more than Labour and the Conservatives admit in their manifestos. 

A damning analysis of both parties’ pledges by the Institute for Fiscal Studies accused both Jeremy Corbyn and Boris Johnson of not being “honest” with voters over taxation, drawing the scathing conclusion that “neither [manifesto] is a properly credible prospectus”.

The IFS said the Labour leader was proposing to increase both taxes and public expenditure to “peacetime highs” but questioned whether he could both bring in revenue on such a scale or realistically spend so much money in five years.

The Prime Minister’s plans would leave public service spending outside of health 14 per cent lower in 2023-24 than it was in 2010-11, so “no more austerity perhaps, but an awful lot of it baked in”, the IFS said.

Millions more people than just those earning more than £80,000 would have to pay extra tax under Labour’s plans as it “doubles down” on its 2017 blueprint.

Its proposals would see tax rises and additional current spending of £80 billion-a-year rather than £50 billion, investment expenditure going up by £55 billion rather than £25 billion, and an “extraordinary” decision to promise £58 billion to compensate “Waspi” women for pension changes.

“It is highly likely that Labour, at least over the longer-term, would need to implement other tax raising measures in order to raise the £80 billion of tax revenue that they want and even just sticking to those proposals they would clearly increase taxes for many millions outside the top five per cent,” said IFS director Paul Johnson.

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“All other countries which tax and spend on the scale that Labour proposes have tax systems which levy more tax on the average worker than we do.”

The IFS director also delivered a withering assessment of Mr Johnson’s offer to the nation and warned of the risk of a form of crash-out from the EU at the end of next year.

“Should they win this time it is highly likely that the Conservatives would end up spending more than their manifesto implies and thus taxing or borrowing more. The chances of holding spending down as they propose over a five-year parliament look remote,” he added.

“Why have they been so immensely modest in their proposals? Because to do otherwise would either mean resiling from their pledge to balance the current budget or would mean being up front about the need for tax rises to avoid breaking that pledge.”

Criticising both parties, the IFS boss added: “While the Conservatives continue to pretend that tax rises will never be needed to secure decent public services, Labour pretends that huge increases in spending can be financed by just big companies and the rich. Neither Labour nor the Conservatives is being honest with the electorate.”

Mr Corbyn is proposing to spend £400 billion on a National Transformation Fund to deliver huge investment into schools, hospitals and other infrastructure, as well as making Britain’s economy green.

But the IFS warned that Labour would not be able to deliver investment spending increases “on the scale they promise” as the public sector does not have the capacity to “ramp up that much, that fast”.

The party was making a series of “huge and complex undertakings”, including renegotiating Brexit, doubling investment spending, overhauling substantial parts of the tax system, “massively” increasing day-to-day spending, major renationalisation programme, increased labour market regulation, and changes to corporate governance and share ownership of large companies.

Mr Johnson added: “All that said, much of Labour’s vision is of a state not so dissimilar to those seen in many other successful Western European economies. Labour’s proposed increase in the size of the state would still leave UK public spending at a lower share of national income than that seen in Germany.”

Increasing corporation tax from 19 per cent to 26 per cent, which if this brought in as much as Labour claims, would take such “revenues to their highest ever in the UK and to among the highest in the developed world”, but ultimately the cost of this extra levy could be passed on to workers, customers and savers, particularly pensioners.

The IFS added: “There has to be serious doubt as to whether elements of their corporate tax proposals would raise the sums suggested. The same is true of the proposed Financial Transactions Tax.” It welcomed proposals to change the taxation of dividends and capital gains.

Labour is planning to increase current public service spending by an extra £73 billion by 2023-24 but the IFS said the party’s pledge to abolish in work poverty within five years is not “achievable” and its plan to scrap Universal Credit is “unwise”.

Keeping state pension ages at 66, rather than increasing them as currently planned, is “another expensive promise”, which is likely to mean another one per cent of national income being diverted towards pensioners in future.

Labour’s plans could lead to borrowing of 3.5 per cent of national income, but the IFS added: “One simply cannot say with confidence whether the overall effect of Labour’s plans on growth would be positive or negative.” 

The IFS raised the alarm over Mr Johnson’s “die in a ditch” approach to Brexit meaning that this could lead to something rather like a “no deal” outcome at the end of 2020.

“That would harm the economy and of course increase the debt and deficit,” it added, predicting that it could lead to the deficit rising “very substantially, possibly to four per cent of GDP.

The IFS also said that the Tories have a number of promises which are not included in their costings, including a £2.7 billion promise to build six new hospitals, £1.2 billion of the £2 billion fund for refurbishing further education college estates, and two major rail projects — Northern Powerhouse Rail and the Midlands Hub.



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