From 3h ago
11.57 GMT
Institute
for Fiscal Studies says there's good chance Reeves will have to raise taxes in
autumn
The
Institute for Fiscal Studies has also released its considered verdict on the
spring statement this morning. Like most thinktanks, it was also commenting
yesterday, but the full number-crunching analysis takes a while.
Here are
some of the key points from the opening presentation by Paul Johnson, the IFS’s
director.
Johnson
said that there is a good chance that Rachel Reeves will have to raise taxes in
the autumn. And he claimed speculation about what taxes might rise could be
economically damaging. He explained:
There is
a good chance that economic and fiscal forecasts will deteriorate significantly
between now and an autumn budget. If so, she will need to come back for more;
which will likely mean raising taxes even further. That risks months of
speculation over what those tax rises might be – a raid on pensions, a wealth
tax on the richest, another hike to capital gains tax? I mention those not to
commend them, far from it, but to exemplify the kinds of taxes regarding which
mere speculation about increases can cause economic harm. With no sense of a
tax strategy, we have no idea which way the chancellor might turn.
Reeves
did not accept this when this point was put to her in interviews this morning.
(See 8.07am.)
He said
that Reeves’ obsession with ensuring she had exactly the same fiscal headroom
as she did in the autumn budget was getting in the way of rational policy
making.
We had
£9.9bn of headroom in October. We have £9.9bn of headroom today. Astonishingly
the numbers are within a mere £2m of one another. It is hard to believe this is
a fluke. The Treasury has clearly worked overtime to ensure that precisely the
same fiscal headroom remains today as was projected in October. This is not
sensible.
He said
that, while the sickness and disability benefit cuts announced last week were
“defensible” (because costs were rising so much), the decision to announce an
extra £500m in cuts yesterday, just to make sure the fiscal headroom figure did
not change, was a mistake.
Whilst
unquestionably tough for those on the receiving end, those original cuts were
defensible as a response to problems manifested by huge increases in numbers of
claimants, and in spending. One could make a defence of them unrelated to the
details of any particular fiscal rule. Coming back a week later with just a
slightly bigger cut because that’s what’s needed to return the fiscal headroom
to precisely where it was a few months ago risks undermining that case and
discrediting attempts at genuine reform to the benefit system. If it was right
last week to announce a halving of the health component of universal credit, it
is hard to see why this week it is right to do more than that by halving it and
then freezing it in cash terms.
He said
having little fiscal headroom, and then applying the fiscal rules rigidly, was
“not conducive to a sensible policymaking process”.
It is the
combination of “iron-clad” pass/fail numerical fiscal rules and next to no
headroom against them that is causing so many problems, leaving fiscal policy
completely exposed to economic developments outside the government’s control.
That is not conducive to a sensible policymaking process. This is not the OBR’s
fault. It is the product of the chancellor’s choices.
He said
future government spending was “even more front-loaded than before”.
Spending
growth is now set to be 2.5% in 2025-26, 1.8% in 2026-27 and 1.0% in each of
the subsequent three years. One should always be sceptical of plans to be
prudent, but only in the future. Front-loaded or not, the problem for the
chancellor is that keeping to these growth rates overall will inevitably mean
cuts for some departments in the years to come.
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