THE ICAEW has carried out a detailed analysis of the Whole of Government Accounts to highlight the importance of taking a wider and more inclusive approach to government finances than the traditional National Accounts.
The professional body conducted its interrogation of the numbers as part of the Institute of Fiscal Studies’ ‘Green Budget 2015′.
Michael Izza, chief executive of the ICAEW, said: “Financial analysis based on Whole of Government Accounts has the potential to transform the debate on public finance from the current narrow focus on balancing the deficit in the National Accounts to a more comprehensive debate about how future governments’ deal with long-term financial challenges”.
The ICAEW found that when it took account of rising charges for future public service pension payments, a ‘proper accounting for assets’, and provisions for the likely future costs of big ticket items such as nuclear decommissioning and clinical negligence, then in 2012/13, the accounting deficit of £179bn was £94bn more than the current deficit reported in the National Accounts.
The IFS Green Budget 2015, was conducted in association with the ICAEW, with analysis from Oxford Economics and funding by the Nuffield Foundation.
It found that debt is set to peak at over 80% of national income with the deficit still more than 5% of national income. This was attributed to poor economic performance at the start of the current parliament, while real spending cuts have been substantially down on those originally planned. No net additional tax rises have been implemented, and tax revenues have ‘proved less responsive to economic growth’ than was expected, the report cites.
Andrew Goodwin, senior economist at Oxford Economics, said: “For UK households the collapse in the price of oil is the equivalent of a large VAT cut, a pre-election giveaway financed largely by the oil producers. This will provide a significant boost to households’ spending power and should mean that 2015 sees zero inflation and 3% GDP growth, a powerful combination. With very low inflation, even such strong growth is unlikely to force the Bank of England to raise interest rates before 2016 at the earliest.
“What’s more if, as we believe, there is plenty of spare capacity in the economy, the UK will be able to continue to enjoy strong growth through the medium-term. Indeed, were it not for the drag from fiscal austerity, we believe that the UK could achieve faster growth rates than those shown in our forecast. If it does turn out that there is still a sizeable amount of spare capacity that may allow the next government to reduce the pace of fiscal consolidation further down the line.”
The report also found that a new government looking to generate more revenue could raise around £5bn by increasing the main rates of income tax by one percentage point, or by increasing all employee and self-employed National Insurance contribution (NIC) rates by one percentage point, or even upping the main rate of VAT by the same level.
All parties had suggested they would like “the rich” to bear their “fair share” of any additional fiscal adjustment. But tax revenues are already highly concentrated – with just 3% of the adult population already coughing up half of all income tax. Any government seeking to raise more tax revenue from the rich “might look at extending the reach of inheritance tax or capital gains tax, perhaps abolishing some existing reliefs”, cites the report.
It also suggests that instead of introducing a separate ‘mansion tax’, council tax could be brought up to date and refocused on higher-value properties.
Further cuts to income tax relief on pension contributions, it posits, are probably best avoided, although subsidies for pension saving ought to be reduced.
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