David Cameron is right: We should balance the budget without tax hikes (City A.M.)

Head of Economic Research Adam Memon wrote for City A.M. on David Cameron’s pledge for a law to prevent tax hikes in the next Parliament, Thursday 30 April 2015. 

“The Prime Minister pledged yesterday to introduce a law to prevent increases in income tax, national insurance and VAT for the whole of the next Parliament. While a law may be a crude tool, it does reinforce two crucial points. First, deficit reduction should come primarily from reductions in public spending rather than further tax rises. Second, reducing the tax burden has broader economic benefits.

The scale of the challenge in reducing the budget deficit should not be underestimated. Public sector borrowing over 2014-2015 was £87.3bn, about 5 per cent of GDP. There is still significant fiscal consolidation required to complete the task of eliminating the structural deficit and ultimately balancing the budget. Further public spending reductions in government departments and the welfare budget are inevitable.

Contrary to the apocalyptic predictions made in 2010, however, the spending cuts carried out so far have not led to a significant deterioration in public services – in fact, there is survey evidence to suggest that, in many areas, the public thinks that service quality has increased. The impression of services quality actually rises among those most likely to use them. Equally, the last few years have shown that fiscal consolidation is compatible with economic growth and rising employment. There is no reason to believe that continued public spending restraint cannot deliver the same or similar outcomes.

There is scope to increase revenues through broader reform of the tax system and simplification measures. However, increases in the rates of the main taxes would be self-defeating. Britain’s productivity performance remains abysmal by historical and international standards. While we can hope for improvements in the future, we can be sure that tax rises which blunt work incentives, damage businesses and reduce investment will only make the task of restoring productivity growth all the more difficult.

This matters, because the failure of productivity to grow adequately has meant that real wages have stagnated. In turn, demands on the welfare budget through tax credits and housing benefits have increased, which has slowed deficit reduction. The percentage of people in work claiming housing benefit has more than doubled over the last six years. Moreover, stagnant real wages have meant that tax revenues – and remember it is the revenue not the rate which matters – have also been disappointing. This makes the task of maintaining sound public finances in the medium term more difficult.

Furthermore, there is nothing socially just about increasing taxes. A family of four living on modest incomes, and already suffering from high childcare, housing and travel costs, would suffer even more from increases in the big taxes. There is nothing especially moral about cutting household disposable incomes. Further, tax rises aimed at businesses will inevitably damage investment and reduce employment, harming the vulnerable the most.

Reducing Britain’s deficit is essential. But it can and should be done without new tax rises.”

To read the full article, visit the City A.M. website

Date Added: Thursday 30th April 2015