The Institute or Fiscal Studies says Labour will increase welfare spending and will not raise revenue they hope from higher taxes, while Tories have failed to spell out £12bn of welfare cuts
28 Apr 2015
Labour's tax plans have been strongly criticised by Britain's most respected economic forecaster amid warnings that its flagship policies will raise "very little money" and inhibit aspiration.
The Institute for Fiscal Studies said that plans by Ed Balls, the shadow chancellor, to bring back the 50p rate of tax could raise as little as £110million and may even end up costing Britain money.
It said that plans to introduce a 10p rate of tax are "unjustifiable" and will have little impact, while Labour's plans to cut tax relief for higher earners will create a "cliff edge" and leave people significantly worse off if they get a pay rise.
The forecaster said the Conservatives have set out just ten per cent of their proposed £12 bn of welfare cuts. Meeting the target would see spending on working age benefits fall to the lowest level since Margaret Thatcher's last year of office.
Overall, families can expect their incomes to fall, either through benefit cuts or tax increases, the think tank said, and parties have been "vague" about their plans.
"With significant deficit reduction still to come, households can expect the tax and benefit changes implemented over the next Parliament to reduce their incomes, on average," it said.
"There are large differences between the Conservatives, Labour and the Liberal Democrats in how they propose to do this.
"But they share a lack of willingness to be clear about the details and an inability to resist the urge for piecemeal changes which would make the overall system less efficient and coherent."
In a withering assessment of Labour’s rhetoric of “tough choices” on welfare, the Institute for Fiscal Studies said that the benefits bill could rise by more than £400million under Labour, under current plans.
It said that the two main cuts outlined by Labour will raise “trivially small” amounts. Capping increases in child benefit at one per cent will raise “literally zero” because of low inflation, while restricting benefits such as fuel payments for the wealthiest pensions will generate a “fiscally irrelevant” and "trifling" £100m.
Overall, because Labour want to abolish the “bedroom tax”, the benefits bill will go up.
The IFS said Labour's pledge to restrict child benefit for two years was "bizarre and indeed misleading" because it included the year 2015-16 - a policy that has been implemented and "already is in the books".
It further warned that Labour's plans for a compulsory jobs guarantee for workless youths amounted to offering companies "free labour" and offered companies and "incentive" to fire staff.
Unless Labour match the Tory pledge to raise the 40p threshold, an extra 1.5 million middle class earners will be paying the levy by 2020, the forecaster suggested.
Labour’s plan to reinstate the 10p rate of tax will leave people only 50p a week better off and it is “hard to think of any economic justification” for the measure, when “virtually identical” effects could be had from raising the basic rate threshold, the IFS said.
And in order to generate the £1.2bn Labour wants from its mansion tax, the levy would require hitting the owners of homes worth more than £3million for £16,000 a year, the IFS.
The IFS, in a pre-election briefing, said the plans of all three parties to raise billions of pounds in tax avoidance measures contained “nowhere near enough” detail. “They have been plucked from thin air to make their numbers add up,” said economist James Brown.
Overall, there are “stark differences” between the two main parties’ plans, with Labour planning more than £12.4 billion in new taxes on companies, the “rich” and anti-avoidance measures, and the Tories largely planning to find new revenue from welfare cuts.
In other findings, the IFS said:
:: Another 300,000 people will pay the higher rate of tax – raising to more than 5 million – even if the Tories fulfil their pledge to raise the threshold to £50,000. The effect of the increase would leave higher rate taxpayers £539 a year better off.
If that does not happen and the rate increases along current trends inflation some 6.5 million could be paying the 40p rate by 2020. Labour have refused to match the Tory pledge, leaving the door open to an extra 1.5 million people paying the levy.
:: Labour’s plans to cut stamp duty for first time buyers “Is likely… to increase house prices, thereby shifting some of the benefit to current property owners.”
:: On the Tories plans to hike the inheritance tax threshold to £1m, the IFS says it is “hard to see a good economic or social rationale for such a policy.” It added: “This policy would help lock older people in bigger and more expensive homes when both they and those looking to buy might be better off if they were to downsize.”
:: Tory and Lib Dem plans to make basic tax allowance more generous to £12,5000 will leave basic rate payers £162 a year better off, but it will largely help upper and middle earners as the poorest 44 per cent already pay no tax.
:: Labour and Tory plans to cut pension allowances will harm the “coherence” of the system and discourage people earning over £150,000 from saving more. “They look like short term, ad hoc changes that we will come to regret as what was historically a relatively rational income tax treatment of pension saving crumbles,” the IFS said.
The IFS also criticised the Tories for setting out just 10 per cent of where their £12 billion of proposed welfare cuts will come from.
If those plans are followed through, it would leave the total social security bill cut to its 2003 levels, before Gordon Brown dramatically increased welfare spending.
It would leave spending on non-protected, working age benefits at their lowest level in real terms since 1990-91, when Margaret Thatcher was still in power.
The target can be hit with “sharp reductions in the generosity of or eligibility to” child benefit, disability benefits and tax credits. Abolishing child benefit would raise £5 billion, cutting child tax credits to their 2003 real-terms level would find another £5 billion, and making housing benefit recipients pay ten per cent of their receipts would raise £2.5 billion.
http://www.telegraph.co.uk/news/general-election-2015/11568086/Labours-tax-plans-savaged-by-IFS.html
