UK tax hike shock horror

The Institute for Fiscal Studies published its annual “green budget”, providing an evaluation of public finances and an outlook for the official UK Budget, due some time in March. The report and eight accompanying presentations (available online) are well worth a look for anyone interested in the UK economy or public finances. The IFS press statement was reasonably upbeat:

If Gordon Brown vacates the Treasury this year, he will leave the public finances stronger than he found them a decade ago, but he will have presided over a smaller improvement than seen in most other industrial countries, according to the Institute for Fiscal Studies' 2007 Green Budget.

Taking account of inflation and growth in the economy, Mr Brown is spending £22 billion more this year than Kenneth Clarke did in 1996-97 (mostly on investment), but raising £31 billion more in tax. This leaves him borrowing £9 billion less. Public sector net debt is £80 billion lower than in 1996-97 and the government's annual debt interest bill is £21 billion lower.

Of course, the British press glossed over the lower borrowing and public debt - it's all a greedy tax grab! Today's front page story at the Daily Express tells it all: Now we all face higher tax bill

Families will be hit with a tax hike of £13 billion over the next five years as schools, hospitals and other public services face further chaos. Gordon Brown needs to raise the already soaring tax burden by an extra £422 per household.

That is on top of the rises in interest rates, fuel bills and also inflation that have left hard-pressed families now struggling to make ends meet.

...The eye-watering tax rises – outlined in a detailed analysis of the economy – will horrify struggling middle-income families, who have overwhelmingly borne the brunt of funding the Chancellor’s tax-and-spend spree over the past 10 years.

The Times also focuses on the extra tax burden: Brown may have to seek £10bn extra tax, says IFS

Gordon Brown may have to raise taxes by £10 billion and slash another £10 billion from public spending to meet his fiscal rules over the next five years, an independent think-tank says today.

The report ...casts doubt on the strength of the legacy that the Chancellor will leave if he moves to No 10 as expected this summer. It argues that the improvements in the public finances over the past decade are less impressive than than those of most of Britain’s economic rivals. It also estimates that tax revenues have risen over that period by the equivalent of £1,300 a family.

...the IFS says that Mr Brown has pencilled in a £20 billion cut in the growth of public borrowing, financed equally by taxpayers and departmental austerity. His Pre-Budget Report contains plans for public spending as a share of national income to fall by 0.8 per cent, equivalent to £10 billion in today’s terms, as well as an increase in the tax burden of the same amount. That would be the “tightest squeeze on spending” for a decade, the IFS says.

Yes, but just because tax revenues are rising, doesn't mean people are worse off. Ceteris paribus, nominal tax revenue should be expected to increase, as prices rise and the economy grows. Otherwise tax revenue will be an ever diminishing share of GDP.

What matters is whether households are better off, in real after-tax terms. With falling unemployment, Labour's boost to tax credits, and a sizeable increase in real wages over the past decade, most households in the UK are considerably better off than in 1997, as ONS data attests. The Times story makes this point in its last para:

A Treasury spokesman said: “These figures are incorrect, and it is ridiculous to suggest that families are worse off under this Government. As a result of personal tax and benefit measures introduced since 1997, households are on average £950 a year better off in real terms, and tax credits mean that three million families pay no net tax at all.”

Quite. But 'massive tax hike' makes a sexier story.

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