Election 2015: The parties’ tax and spend cases
With the election looming, Accountancy Age makes a detailed examination of the feasibility of the main parties’ fiscal plans
With the election looming, Accountancy Age makes a detailed examination of the feasibility of the main parties’ fiscal plans
BRITAIN has entered a new era of multi-party politics with half a dozen leaders now clamouring for the electorate’s attention. From the old two, and renaissance of the three-party system of politics, this year’s election campaign has provided unprecedented platform the likes of UKIP, the SNP, the Greens and Plaid to connect with the British public.
From the incoherent cacophony that was the so-called ‘seven dwarves’ debate on ITV to the BBC’s more civilised but hardly more illuminating ‘challengers’ debate, there has been no lack of heat in the battle for Number 10.
The light shed on the feasibility of the main parties’ fiscal promises, however, has been almost Gormenghastian in its paucity.
According to the Institute of Fiscal Studies’ pre-election examination of the main political parties’ spending plans, the independent think tank found that none of the parties have provided “anything like full details” of their fiscal plans, leaving the electorate “somewhat in the dark” as to both the scale and composition of likely spending cuts and tax increases.
With the deficit in 2014/15 still at 5% of national income, all the main parties have pledged to reduce it over the coming parliament. And there are genuinely big differences between the main parties’ fiscal plans.
The Conservatives’ plans could see national debt falling from about 80% of national income to 72% by the end of the parliament while debt might fall only as far as 77% under Labour plans – a difference equivalent to about £90bn in today’s terms.
“The electorate has a real choice, although it can at best see only the broad outlines of that choice,” says Carl Emmerson, IFS deputy director.
“Conservative plans involve a significantly larger reduction in borrowing and debt than Labour plans. But they are predicated on substantial and almost entirely unspecified spending cuts and tax increases.
“While Labour has been considerably less clear about its overall fiscal ambitions its stated position appears to be consistent with little in the way of further spending cuts after this year.”
According to the IFS report, the Conservatives’ borrowing reduction is predicated on £5bn of largely unspecified anti-avoidance measures, £10bn of unspecified social security cuts, and £30bn of cuts to unprotected departmental spending.
Labour’s plans include some small net tax increases, and their commitments to increase certain areas of public spending are no bigger than the Conservatives. The big difference, the IFS suggests, is their much looser fiscal rule.
“If they can find £7.5bn of revenues from anti-avoidance measures, as they say they can, then they might need to find a mere £1bn from further real cuts to unprotected departmental spending, the think tank posits,” the IFS says.
The Liberal Democrats’ plans would require £12bn of cuts to unprotected departments. Their plans are predicated on two other optimistic claims. First, the vast majority of their planned cut to social security spending is to come from their ambition to reduce fraud and error in the system and to get better at helping benefit recipients back into work.
Second, they wish to raise £10bn by the end of the parliament from largely unspecified and highly uncertain measures to reduce tax avoidance and evasion.
The SNP are the one major party not to have used largely made up assumptions about how much they could raise from clamping down on tax avoidance to try to make their sums add up. Their proposed tax giveaways appear to be offset by their tax takeaways, while they would increase the generosity of the social security system.
• Eliminate the deficit and run an overall surplus by the end of the parliament
• Raise personal allowance to £12,500 and 40% tax threshold to £50,000
• Increase inheritance tax threshold for married couples and civil partners to £1m
• No rise in VAT or NI contributions
The package of tax changes outlined by the Conservatives would be “broadly revenue neutral”, the party claims. They have pledged to increase the personal allowance to £12,500 and raise the higher rate threshold to £50,000 by the end of the next parliament. If completed in 2020/21 the measure would cost around £6bn, according to the IFS.
The Conservatives look set to continue their pursuit of business-friendly tax policies, but the introduction of the Diverted Profits Tax – often dubbed the ‘Google Tax’ – outside of the OECD’s BEPS project has undermined the party’s proposition. They hope to raise at least £5bn of revenues by 2017/18 through anti-avoidance measures.
“The extent to which this is achievable is highly uncertain, given the lack of information on the tax base in question, and the lack of detail regarding the specific policies that they would implement,” the IFS said in its report.
Despite that “embarrassment”, as the OECD dubbed it, the party reaffirmed its commitment to remaining the most competitive tax jurisdiction in the G20, while it has also pledged to retain and expand the Office of Tax Simplification.
The party’s pledge to scrap inheritance tax on homes under £1m may play well politically, but there is little in the way of sound economic evidence for the policy, according to the Institute for Fiscal Studies, although it is unlikely to prove much of a costly move, either.
“They are not promising they’re going to do a great deal more,” says Stewart Adams of the Institute for Fiscal Studies. “They have made big cuts [to corporation tax] in the current parliament, and they are not proposing any major change.”
• Cut the deficit every year, with a surplus on the current budget and national debt falling in the next Parliament
• Re-introduce the 50% top rate of income tax for people earning over £150,000, and the 10% starting rate
• No rise in VAT, NI or basic and higher rates of income tax
• Introduce a “mansion tax” on houses worth over £2m
• Abolish non-dom status
Plans to eradicate the non-domicile status and the proposal to introduce a mansion tax for homes worth more than £2m have dominated the headlines around Labour’s tax policy. Unlike the Conservatives, Labour looks set to take a harder line on business and wealth.
Indeed, the pledge to be the most competitive corporate tax environment in the G7 has very different permutations to the Tories’ G20 promise, given the highly-taxed Canada, Japan and US’s presence in that group, allowing Labour additional wiggle room to raise the headline rate.
A significant portion is concerned the non-domicile plans will cause wealth creators to take flight, and while few would defend the inheritance of the status and its focus on the male lineage, many – such as the IoD – would have preferred to see changes consulted on.
However, business won’t be wholly alienated. A rise in corporation tax – potentially as high as 26% over the course of the parliament – will be offset by a proposed cut in business rates.
On the personal front, a lower 10p starting rate for tax will be introduced, paid for by ending the marriage tax allowance, while a return of the 50p rate for those earning above £150,000 is also on the agenda.
“There are a lot of anti-business policies in the [Labour] manifesto,” says Moore Stephens tax partner Kevin Phillips. “The bank levy is not unique to them – it was introduced under the current government – it’s been hiked and hiked and Labour has announced they will hike it again and they’ve announced they will introduce a bank bonus tax.
“It feels a little like the non-dom policy. There may be money there, but you’re singling out a deeply unpopular sector of the economy with the public for punitive tax treatment. How much is sensible policy and how much is populist?”
• Deal with deficit by 2017/18
• Raise the income tax threshold to £12,500
• Raise up to £1.5bn from a tax on homes worth over £2m
• Bring in £14bn from tax rises on corporations and the wealthy, and reduced tax avoidance
• Increase charges to “non-doms”, raising £130m
Like Labour, the Liberal Democrats are seeking to shift the tax base away from earnings toward what it terms “unearned wealth”. Part of that entails lifting the personal allowance up to £12,500 – a commitment shared by the Conservatives – while the mansion tax on homes over £2m also remains on the agenda.
Powers to allow local councils to charge second homeowners up to 200% have also been tabled, in order to deter wealthy from the practice and driving up the house prices in rural areas.
Further attacks on tax avoidance – they expect to raise £7bn by 2017/18 – can be expected should the Lib Dems return to government, while taxes on the wealthiest, on banks and big business and on polluters will also prove a tool to limit the impact of deficit reduction on public services, the party claims.
On non-domiciles, the Lib Dems propose to consult and alter the regime, rather than its total removal as Labour proposes.
“They [Lib Dems] have a problem with capital taxes and they love inheritance tax,” says Institute of Directors’ head of taxation Stephen Herring. “You should tax income and gains, not for someone holding something. They should seek to merge capital gains tax and inheritance tax so we have a single tax on capital.
“They’re too focused on the personal allowance increase to the exclusion of all other personal tax reforms. The rate of tax people pay at the margin is important,” he says.
• Eliminate the deficit by the third year of the next parliament
• Increase personal allowance to £13,500
• Scrap inheritance tax
• Introduce new 30p tax band for those earning between £45,300 and £55,000, and a 40% rate thereafter
• Cut business rates for small businesses
Nigel Farage launched UKIP’s manifesto with the promise of a “low tax revolution” and £18bn of tax cuts.
Among the pledges were promises to keep workers on the minimum wage out of tax, raise the 40p tax rate threshold to £55,000, introduce a new 30p tax band and to scrap inheritance tax.
Farage (pictured) claimed the moves are “fully-costed”, but the Conservatives claimed there is a £37bn black hole in the plans.
“UKIP has a plan, we genuinely want to make working people better off. And we will do that by leading the charge and making the argument for a low tax revolution,” he said.
“We genuinely want to make work pay and for people to have incentives to do better. And we believe that will unleash a kind of economic dynamism that has not been seen in this country in a long time. What I am proposing is a big tax giveaway of £18bn.”
• Raise £30bn a year by 2019 by cracking down on tax avoidance
• Introduce a wealth tax of 2% on people worth £3m or more, raising £25bn a year by 2019
• Introduce a 60% income tax rate for salaries above £150,000 a year incur 60% income tax rate
• Raise £20bn a year by 2019 by hitting banks with a financial transactions tax
In terms of feasibility, the Greens have a lot of convincing to do. Huge spending is planned should the party achieve the astonishing and make it into government. One commentator described the party’s case as of “fantasy economics”, with the taxation proposals unlikely to get close to covering the costs of its many substantial projects.
By way of example, the party is proposing over the course of the coming parliament to build 500,000 homes for ‘social rent’, at the cost of £27bn. Most of that sum would be derived from the removal of the mortgage rate tax relief from private landlords, according to Green leader Natalie Bennett.
“Tax relief is often offered because you’re doing a public good, but at the moment landlords are collecting large amounts of funds from the public purse from housing benefit and we’re not seeing the benefit of that,” she told the Independent.
The party also proposes a ‘Robin Hood tax’ on financial transactions and a ‘wealth tax’ on the richest 1% of the population, both of which are likely to lose the party the business vote.
The policies would entail a major overhaul of the economy and tax code, making their proposition an unrealistic one.
• Increase spending by 0.5% a year
• Restore the 50p top income tax rate for those earning more than £150,000
• Abolition “non-dom” status and reverse married couple’s tax allowance
• Tax bankers’ bonuses, introduce a bank levy, a mansion tax and crackdown on avoidance
The tax policies contained in the Scottish National Party’s manifesto are closely aligned to Labour’s own manifesto pledges, advisers have noted.
In particular, the two parties have a tax on bankers’ bonuses, a bank levy, a mansion tax, a crackdown on tax avoidance, the abolition of non-domicile status and the reversal of the married couple’s tax allowance in common.
On National Insurance Contributions, the SNP will increase the annual reduction for businesses gradually to £6,000 – up from £2,000 – which would allow one-man companies to make a salary payment of over £43,000 with no employer’s NIC. Currently, the Scottish government lacks powers over NIC. The SNP wants these powers devolved to Scotland.
Some warn, however, it is “not hard” to imagine a negotiation under which the SNP – led by Nicola Sturgeon – don’t try to force through an increase for the whole of the UK in return for being given the power to control National Insurance north of the border.
“The difference is that some of these policies would be unlikely to affect large numbers of Scottish voters,” notes Baker Tilly senior tax partner George Bull.
“In Scotland, the reintroduction of the 50p tax rate would only affect around 14,000 people earning over £150,000. The mansion tax, if introduced for properties worth more than £2m, might only apply to 1,000 Scottish properties. As for non-doms, one might assume there to be greater numbers in London and the south east of England.”
• Cut business rates for small and medium sized businesses, with 70,000 paying no rates at all
• Re-introduce 50p income tax rate for those earning over £150,000
• NI contributions to be paid to same level as income tax
Naturally, many of Plaid Cymru’s key policies involve greater devolution of powers to Wales, essentially matching Scotland’s level of tax power, and providing Cardiff with power over corporation tax, too.
Indeed, Scotland is providing something of a template for the party, with a key demand being the same level of funding per head as its celtic counterpart.
Loosely aligned with Labour, Plaid Cymru is keen to “reverse austerity” in the UK and distribute wealth more evenly. Like Labour, a return of the 50p rate for those earning more that £150,000 is on the cards, while the threshold at which national insurance contributions are made would be raised to match income tax. The upper earnings limit on NICs will be raised to £100,000, too.
The party also pledges to clamp down on corporate tax avoidance and beef up HMRC to help towards that goal.