£6bn in tax rises needed to fill black hole, warns think-tank

July 1, 2013

The Chancellor may be forced to find billions of pounds from tax rises, despite the latest round of spending cuts, a leading think-tank has claimed.

According to the Institute for Fiscal Studies (IFS), the Government will need to increase taxes to the tune of £6bn after the general election in 2015.

Whichever party comes to power, economists have warned that ministers will need to make up a £25bn shortfall in the public finances.

The IFS suggests that the middle classes could ‘bear the brunt’ of any tax rises, particularly if the Government adopts the previously favoured ‘fiscal drag’ method.

It predicts that freezing the £42,285 tax threshold until 2019 would pull around one million extra people into the 40p higher rate band as their earnings rise by approximately the rate of inflation. This would equate to an additional £580 extra per person each year.

Increasing VAT to 21% or introducing a 1p increase in income tax would generate more than enough to cover the black hole in the nation’s finances, the IFS said. However, both of these options would be unlikely.

The Government recently set out £11.5bn in spending cuts for 2015/16, although it is understood that further austerity measures will need to be introduced after this period.

Commenting, Paul Johnson, the director of the IFS, said: ‘At almost any other moment in the past 60 years, announcements of spending cuts of this scale would have created a storm.

‘At some point we are going to have to have a serious debate about whether all the rest of the fiscal consolidation is really going to happen through spending cuts alone.

‘The easiest way of doing it would simply be to allow fiscal drag to work — don’t increase allowances and don’t increase the point at which you pay the 40p tax. That gets you that kind of money relatively quickly’.


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