Tuesday, August 31, 2010

Dealing with the Deficit

Alan Beattie, the Financial Times' International Economy editor has challenged me to put forward a set of proposals to plug the budget deficit. Since he seems like a decent enough chap, I thought I'd oblige. It's a bit rough and ready but should hopefully do the trick.

Some Initial Notes
Firstly, I'm going to look to target the structural deficit, a large part of the deficit will disappear as the economy recovers, what we're concerent with is the bit that will still be there. I've set a target figure
of 4% of GDP, this is on the optimistic side but even if it's not the whole deficit it's enough to eliminate most of it.

For I'm using 2009 GDP of £1.392 trillion and applying the OBR figures of 1.2% and 2.3% to arrive at a working higure of £1.442 trillion for 2011. This gives us a target of £57.7 billion in cuts and tax rises. As a final note, I've not gone as far as taking into account dynamic effects from taxes and cuts. I've picked 2011 because the HMRC cheat sheet figures (see below) for 2010 look like they have been adversely affected by the recession, 2011 should (hopefully) represent a more typical year.

Getting On With It
I'm going for a 50/50 split of cuts and taxes so that means finding around £28.8bn of each. For tax rises, I'm using this HMRC Cheat Sheet. For cuts I'm using the BBC's cuts calculator

The heavy lifting here is done by income tax, the basic rate has been given most of the work, it's an unfortunate truth that there is only so much that can be raised by taxing the rich. I've steered clear of VAT and where possible looked at taxes that will have the smallest impact on consumption.
  • Basic Rate Up By 3p in the UK and Scotland (£15.45bn)
  • Higher Rate Up By 4p (3.12bn)
  • Freeze Allowances for 1 year (Assume 3% inflation) (£2.55bn)
  • Increase Small Companies Corporation Tax Rate by 1% (£390 million)
  • Increase Corporation Tax by 4% (£3bn)
  • Increase Capital Gains Tax to 45% (£2.97bn)
  • Stamp Duty to 5% on properties over £500K (£750 million)
  • Increase IPT by 1% (£430 million)
  • 4p on a pint of Beer or Cider (£436 million)
  • 17p on a bottle of wine (£303 million)
  • 44p on a bottle of spirits (£136 million)
  • 24p on a packet of cigarettes (£135 million)
  • 2p on a litre of Petrol (£420 million)
  • 1p on a litre of Diesel (£238 million)

Total £30.33bn

I've gone in to less detail on cuts, mainly because as one person I just don't have the knowledge of where the cuts could be made for the least pain, I have however put a cap on cuts at 5%, with slightly lower cuts to Welfare and Health and no cuts to Housing.

  • Welfare 3% cuts (£5.88bn)
  • Health 5% cuts £6.10bn)
  • Education 5% (£4.45bn)
  • Defence 5% (£2.00bn)
  • Public Order & Safety 5% (£1.80bn)
  • Personal Social Services 3% (£0.99bn)
  • Housing No Cuts
  • Transport 5% (£1.10bn)
  • Other 5% (£4.7bn)

Total £27.02bn

The total is £57.3billion, a little short of our target but close enough.

A Few Closing Thoughts
It's worth noting that foe Labour to spell out a plan in detail like this would be very politically dangerous, I've tried as much as possible to avoid upsetting anyone too much, but in the end there are some pretty unpopular taxes in the list. I don't mthink all is lost though.

First, the figures above are to deal with the majority of the structural deficit, if we follow Labour's half the deficit plan, we would only need to do half of the above in the course of a parliament, if we were to take a more relaxed approach to the deficit (as Ed Balls proposes) we need to do even less. The second point is that the popularity of certain tax rises/falls is highly dependent on media coverage. The cut iun income tax from 22% to 20% did little for Labour's popularity, the 10p tax was hugely unpopular and a 2007 change to NI that raised nearly £12bn went completely unnoticed. A lot depends on the way the changes are handled politically.

As a final note, there are a few options I've not used here, transaction taxes and land value taxes, for example. I've left these off mainly because I'm not sure of the costings. Finally, there is the option of monetising part of the deficit, it's a radical option but definitely one that should at least get some consideration.


AlanB said...

OK, but *what* would you cut from education, health and welfare? "5%" doesn't mean much: "ending Sure Start" means something. As you note, the political impact can vary considerably depending on how it is portrayed and received, and you can be sure as hell that the press won't be reporting "5% cuts in education" when they can be reporting "2000 schools to close".

Andreas Paterson said...

Alan, the unfortunate answer I have to give is that I don't know. I don't know of any place where I can easily obtain figures with the kind of detail you're after (if you know of any resource I've missed, please tell me).

You may be of the opinion that Labour should produce more detail on it's plans but this is not something I have the time or resources to do myself.