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The hard road to 80:20 – an autumn statement preview

In the run up to a budget or autumn statement, one piece of paper becomes the most important in Whitehall: the scorecard. This is the table which sets out the net effect of the government’s planned decisions: how much is raised in revenue and how much is spent on services and/or foregone in tax cuts. When the budget is announced, it is published in the Treasury document as a summary table of decisions. It is the place to look if you want to get behind the chancellor’s spin, since it will often make clear the sneaky measures which raise money but didn’t feature in the press briefing, and it tells you the truth about how much each individual decision is really worth. The figures tell the story.

Next week’s scorecard will be especially interesting. Although a lot of the headline attention will focus on whether the chancellor has missed his debt target and whether spending cuts will be extended through to 2017/18, we are likely also to see quite a few important tax and spending decisions. This is because the chancellor wants to set out the basic arithmetic for government spending in 2015/16, the final year in which the Coalition will govern (for a month before the election), while at the same time making further progress on welfare cuts and responding to political pressure on fuel duty.

It has been reported that the chancellor wants to maintain the headline 80:20 ratio between spending cuts and tax rises for the fiscal consolidation in 2015/16. Currently, the implied cuts/rises ratio is 96:4. Using the figures from the March 2012 budget, he would need to find £22.4 billion in cuts and £5.6 billion in tax increases in order to shift the ratio to 80:20. Of course, the UK’s economic performance has deteriorated since the budget, so the chancellor could be faced with a bleaker fiscal scenario, as both the SMF and IFS have recently set out. But assuming that the rate of fiscal consolidation is maintained as planned in 2015/16, we can expect cuts and tax increases of this order of magnitude.

How might he raise the taxes? Restricting higher-rate pension tax relief further would be fair and it would raise tidy sums. If all pension contributions were restricted to basic rate relief, the Treasury would raise £7 billion – but a sweeping move of this kind is unlikely. Instead, the chancellor could further reduce the annual or lifetime allowances. The Resolution Foundation recently estimated that restricting relief to a lifetime allowance of £1 million would raise up to £1.5 billion a year.

The chancellor has also spent the summer quietly consulting on a new holding charge on properties valued at over £2 million owned by non-doms. This could be presented as a ‘son of mansion tax’ and it would help further in taking the heat out of the high-end London property market, which has become a global reserve currency for the word’s super-rich. Further stamp duty increases for high-value properties have also been mooted, beyond the newly introduced 7 per cent rate on properties worth more than £2 million (which is planned to raise £180 million next year). Putting all this together might conceivably get the chancellor over the £5 billion line, but he’s likely to need something more to get the whole way.

The chancellor has also indicated that he is seeking £10 billion of welfare cuts by 2016/17. To get to that figure, the Treasury would need to find £6.6 billion in 2015/16. A freeze on working-age benefits in 2013/14 and 2014/15 is likely to give him the lion’s share of this, since it is like compound interest in reverse: if you cut the baseline in 2013/14 and freeze it again in 2014/15 then the net effect is higher savings by 2015/16.

There are also other measures to factor into the equation. Delaying the fuel duty increase again will cost £550 million. Raising the personal tax allowance by £1,100 to £9,205 from April 2013 cost the chancellor a whopping £3.3 billion at the last budget, so any further progress on that score might wait until next year. But if he wanted an eye-catching stimulus measure he could announce a further £100 in tax-free income, at a cost of £590 million in 2013/14. An announcement of extra funding for childcare has also been suggested – if done properly, this would be a better targeted measure than raising the personal tax allowance and more effective at lifting the employment rate.

Overall, however, the consequence of holding to an 80:20 ratio on cuts and tax rises is that the burden of further fiscal consolidation will be carried overwhelmingly by those in the lower income deciles, since they rely most heavily on tax credits and social security benefits, and gain most value from public services. By definition, if the ratio of cuts to tax increases is 80:20, the Liberal Democrat ambition that the rich shoulder the greatest burden will not be achieved. That is a certainty. Next week’s autumn statement may do many things, but it is unlikely to be progressive.

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