£7.2bn of tax cuts would be nice, but can we afford them?
Everyone likes to have more money in their pocket so for politicians fast approaching election day, promises around income tax are easy wins but can we actually afford them?
Prime minister David Cameron has already promised £7.2 billion of tax cuts if he makes it to the next parliament.
He's going to give us back this huge amount of money through two reforms to income tax thresholds: firstly he's going to increase the personal allowance – the part of your salary you don't pay tax on to £12,500 from £10,000– and secondly, he's going to increase the higher rate income tax threshold to £50,000 from £41,900 so fewer people pay 40% tax on their earnings.
'Yes please!' I hear you cry and it's a tempting prospect but my concern is whether we can actually afford a tax giveaway of this magnitude when for all intents and purposes we are still in the middle of an austerity programme.
Just ask the government about cutting benefits and it will tell you the country cannot afford to pay for those who rely on the state but it's a different story when it comes to tax breaks that will win votes.
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Mis-match
The required annual saving to get the country back on track and reduce the deficit is a whopping £48 billion, that's every year. Although we need to find this huge sum, the Tories are planning to take more people out of income tax – as the increase in the personal allowance will do – and therefore reducing the tax receipts the Treasury collects. It doesn't add up.
Don't get me wrong, I'm all for people having more of their money (especially when corporations are allowed to keep so much of their profits) but there has to be an element of realism when it comes to balancing the sums.
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A Whitehall insider told the Financial Times that the mis-match between the need to cut the deficit and the reduction in tax receipts is a 'potential disaster' and I can't help but agree.
Even if the UK's tax system worked perfectly and the annual tax gap of £34 billion between what should be collected and what is collected was eliminated, it still wouldn't be enough to fund the austerity measures.
As it stands, we have a far from perfect tax system and giving away tax breaks is a sure fire way to push it precariously to the edge.
Read more:
Osborne promises biggest tax cuts
No room for income tax cuts
Q & A: what Cameron's tax pledge means for you
