'No room' for income tax cuts


George Osborne visits AW Hainsworth factory

Britain's "dangerous" debt levels mean Chancellor George Osborne has no room for cuts in personal taxes like income tax, a think-tank has warned.

The UK's return to growth over recent months, coupled with figures last week showing state borrowing was lower than predicted, have prompted speculation that Mr Osborne could use next week's Autumn Statement to reward voters with tax giveaways.

But the Reform think-tank said the UK's debt - currently around £1.1 trillion - is heading for "clearly unsustainable levels" and new tax cuts for individuals must remain "off the table" to protect economic confidence.

Meanwhile, a second report called for "robust" new fiscal rules to bind future governments to reducing state debt, after half a century in which the UK has spent more than it took in for 49 out of 53 years.

Mr Osborne has promised to run a surplus - spending less than he takes in from tax and other revenues - even after he has eliminated the state deficit, which he aims to do around 2018.

But the r ight-of-centre think-tank Policy Exchange said the Office for Budget Responsibility should be given powers to enforce a surplus of 1% of GDP after 2017/18, gradually bringing total debt down to pre-financial crisis levels over the 16 years to 2034/35.

A breach of the rule should trigger automatic freezes in public sector pay, state pensions, tax allowance thresholds and benefit payments to rein in spending and keep debt on a downward trajectory, said the paper, entitled Money for Nothing.

The UK's debt is projected to top 100% of GDP by 2015, and the nation will have one foot hovering over a "fiscal abyss" unless the ratio is reduced to a sustainable level, said Policy Exchange.

Author Ed Holmes said: "Businesses, households and financial markets need to be given confidence that the difficulties which have arisen in the public finances will be repaired and reassured that the institutions and procedures in place are sufficient to ensure it does not arise again. Without this framework binding governments to strict fiscal commitments, deeper recessions, tax rises and greater spending cuts may become a long-lasting fixture for the UK."

The Reform report, Mind the (Fiscal) Gap, found that even with forecast increases in taxes averaging £380 per family by 2033, the UK's state debt will continue to head upwards after 2018, in part because of the impact of an ageing population.

While avoiding tax cuts, future chancellors must also be careful not to target tax hikes only at working-age people, as this would "place a heavy burden on many people at the key productive stage of the life cycle and have serious effects on incentives and on economic growth".

Instead, the report urged ministers to review tax breaks for pensioners, who will make up a larger proportion of the population in the UK of the future.

Ending the exemption on paying national insurance over state pension age could raise £735 million a year and only affect the 6.3% wealthiest over-65s, said Reform.

The report questioned the future of the £24 billion-a-year tax relief for pensions, which it argued is "expensive, poorly targeted and fails to achieve its policy objectives".

The report poured cold water on Liberal Democrat plans to ease the cost-of-living crisis by taking more people at the bottom of the pay spectrum out of income tax.

Increasing the tax threshold to £12,500, as Lib Dems want, would cost £15.9 billion a year, but only 1.3% of that money would go to people earning below the equivalent of the minimum wage for 35 hours a week, said the report.

Andrew Haldenby, director of Reform, said: "A hint of economic growth will tempt all political parties towards expensive tax giveaways. Instead they should help the public understand that ever-increasing spending cannot be made available to them at little or no extra cost."