Think-tank warns on tax rises and spending cuts

A leading think-tank has argued that none of the three main political parties has ventured far enough in identifying the sort of spending cuts and tax rises that may be necessary to reduce the UK's budget deficit.

The Institute for Fiscal Studies (IFS) has issued a report which estimates that the Conservatives are planning the deepest retrenchment of public spending since the Second World War, while Labour and the Liberal Democrats are aiming for cuts more severe than anything seen since the mid-1970s.

But none of the parties has yet come close to spelling out exactly where the spending reductions will hit.

The IFS said: "Repairing the public finances will be the defining domestic policy task of the next government. For the voters to be able to make an informed choice in this election, the parties need to explain clearly how they would go about achieving it. Unfortunately they have not. The opposition parties have not set out their fiscal targets clearly, and all three are particularly vague on their plans for public spending."

According to IFS figures, the Conservatives must find £64 billion worth of spending cuts each year but have so far only pinpointed 20 per cent of the necessary reductions.

To meet its targets, Labour must impose cuts of £51 billion but has, to date, identified just an eighth.

The Liberal Democrats are planning reductions to the tune of £47 billion but have detailed just a quarter of them.

The gap in the planned cuts reflects the extent to which the various parties will be using tax rises to make good the difference in savings.

But the IFS called into question the ability of any of the parties to deliver the promised closing of the budget deficit through efficiency savings alone.

Robert Chote, the IFS director, said: "This may suggest that all the parties are being overambitious in the extent to which they expect spending on public services to take the strain.

"If so, the next government may rely more on further tax increases and welfare cuts than any of the parties are willing to admit to beforehand."

On the question of tax rises, the IFS calculated that Labour would need to raise an extra £7 billion in taxation each year to 2016, while the Conservatives would have to come up with another £3 billion annually.

Labour intends to tackle the budget deficit with a 2 to 1 ratio between spending cuts and tax rises, the Liberal Democrats with a ratio of 2.5 to 1, and the Conservatives with a ratio of 4 to 1.

The IFS criticised the government for not setting up a comprehensive spending review ahead of the election, the Conservatives for proposing to reverse the planned 1 per cent increase in national insurance contributions and the Liberal Democrats for their policy of restricting tax relief on pension contributions.

Mr Chote said: "Looking at the structure and efficiency of the tax system, Labour's pre-announced measures are not an attractive package (even given the need to raise revenue).

"The Conservatives would not improve matters. They would partially reverse what is probably Labour's least bad tax increase and add new complexities and distortions of their own.

"The Lib Dem package would remove some undesirable distortions and inconsistencies of treatment. But their plan to restrict pension contribution relief is misguided. Although it is somewhat more coherent and less complex than the other parties' plans it applies to many more people."

Many economic analysts are already predicting that any new government, whatever its colour, will need to give serious consideration to bumping VAT up by at least 1 or possibly 2 percentage points following the election.