Yesterday, the Resolution Foundation published five ways for the Chancellor to ‘find’ £4.4 billion without pursuing the tax credit cuts. Here they are:
- ‘Increasing the personal allowance in line with inflation, rather than accelerating it towards £12,500, raising £4.9bn by 2020.
- Increasing the basic rate of income tax limit to rise in line with inflation, rather than accelerating it so the higher rate threshold reaches £50,000, saving £1.3bn by 2020.
- Reversing the increase in the inheritance tax threshold and cuts to corporation tax saving £3.4bn by 2020.
- Scaling back the over-indexation above earnings of the state pension from the last parliament by limiting pension rises in this parliament, saving about £6bn.
- Returning spending on tax reliefs to 2010 levels by 2020 – and thereby reducing the UK’s current £100bn spend on about 1,000 different reliefs, which would save about £10bn.’
The Foundation deserve some praise for having proposed some alternatives at all. Too often the opponents of the cuts simply deny the need to replace them with anything. Resolution have at least considered the numbers.
But, that’s as far as our praise can go. Readers will note that four of the five proposals are in effect tax increases – ‘finding’ money by just taxing people or businesses more.
When faced with the difficulties of the public finances, one cannot rule out any and all tax rises forever. But it cannot be the solution to rely on them ahead of cuts in public spending. Are we really meant to accept, only a few months into a government elected on the basis of its commitment to reining in public spending, that there are no more savings to be found in our annual public spending of well over £700 billion?
That would be fantastical – almost as fantastical as that entertained by those who deny the need to ever tackle the deficit.
Only one of the Resolution Foundation’s proposals – reducing planned increases in the state pension – is a spending cut. But it would also breach a clear manifesto promise. Osborne may, as Nick Timothy argued earlier this week, have bound himself up in promises, but whether that was wise or not the pledges must still be honoured.
ConservativeHome is not arguing that the Chancellor should abandon his plans – he may have a halfway house of mitigation in mind, for example – but if he now believes they are politically unsustainable, there are alternatives available.
Given total freedom, there are plenty of savings we would like to make – particularly those targeted more at the better off, such as reducing universal perks for pensioners who are sufficiently well-off as not to need them, or abolishing HS2. But the Government has promised not to do so, so we must be practical.
If the tax credit plans are to be ditched, then the replacement plan must satisfy three criteria: it must be a spending cut, it must not breach a manifesto pledge, and it must also be a real saving deliverable in the relatively short term (ideas like “reform the housing market, so rent eventually falls and leads to lower housing benefit” don’t quite fit the bill).
The Resolution Foundation proposed one spending cut, which did not meet these criteria. Instead, then, here are two which do:
- Reform child benefit by applying it only to those in receipt of child tax credits. This idea, floated by the IFS in May, would save around £5 billion. As they said at the time: “It would be a big cut, meaning that the majority of families with children would lose at least £1,000 per year, with only the entitlements of approximately the lowest-income third protected.” It would be controversial, but if your aim is to shield the poorest from losing out and shift the burden to relatively higher earners then it would do the job. (Some argue that child benefit was originally based on a tax allowance, and therefore that this proposal is a tax rise, however the payment is now widely regarded as a long-established part of the welfare system.)
- Abolish BIS and reassign its necessary functions. Proposed by the TaxPayers’ Alliance in their Spending Plan, this would save around £4.1 billion in 2016-17. It would be a major change to Whitehall, but its proponents argue that if you want to save major amounts of money then major change is what you need. (Dominic Raab, among others, has argued for sizeable Whitehall restructuring of other departments, too, which would either save even more money or allow the burden of savings to be spread more widely, depending on your preference.)