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Tax and spending choices in the next Parliament

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26th Sep 2014
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Corporate tax avoidance, tax rises, spending cuts and the deficit were debated this week at a Labour party conference event organised by the Chartered Institute of Taxation (CIOT) and the Institute for Fiscal Studies (IFS). Nick Huber reports.

Labour leader Ed Miliband forgot to mention Britain’s deficit in his party conference speech on Tuesday but this matter was certainly not overlooked by a panel including Chris Leslie, Labour’s shadow chief secretary to the Treasury, Bill Dodwell, vice president at the CIOT and tax partner at Deloitte, and Paul Johnson, director at the IFS.

The CIOT and IFS will also debate tax and spending at the Conservative and Liberal Democrat party conferences.

Highlights from the wide-ranging debate in Manchester’s Neo-Gothic Town Hall included the following:

The deficit

Official figures published on Tuesday showed that Britain's public finances weakened in August.

Chancellor George Osborne had to borrow £11.6bn in August, up about 6% from a year earlier, to fill the gap between revenue and spending, according to the Office for National Statistics.

The UK economy may be growing faster than any other industrialised nation but there will be a lot of economic pain to come whichever party gets elected.

The chancellor has said a re-elected Conservative government would try to eliminate the deficit before the end of the next 2015-2020 parliament.

Labour has promised to do something similar although it will only try to eliminate the budget deficit in current terms (excluding investment spending) in the same period.

Johnson said that more than half of the current government’s planned spending cuts are still to come.

Labour’s aim to balance books under current spending, allows more “wriggle room”, Johnson said. It could spend about £28bn more by 2018-19 and still meet its deficit target.

Any government will face three “unpleasant choices”, Johnson said. One: huge public spending cuts and the lowest public spending since 1948; two: less big cuts to public services but substantial cuts to social security; and three: increase taxes.

Tax avoidance

Collecting more tax from global companies could reduce the need for spending cuts and tax rises.

Earlier this month, the Organisation for Economic Cooperation and Development (OECD) published recommendations for new rules to reduce international tax avoidance by big companies.

Dodwell said that the current corporate tax rules were designed before internet and services were delivered digitally.

The main objective of the proposed new rules is that “fewer profits are taxed nowhere,” he said.

Getting the 44 countries in the OECD to agree on the tax reforms may be difficult, but it may create a fairer tax system, Dodwell said.

Scottish tax

Giving Scotland more tax powers will be another important decision for the next government.

All parties have promised Scotland more control over its tax after its people voted against independence in the referendum earlier this month.

Dodwell said giving Scotland’s government control over corporation tax would be a bad idea: “I wouldn’t pass control over corporation tax to individual parts of UK,” he said. “You’d end up with a smaller UK cake and a race to the bottom which makes little sense within a country. You will end up with unnecessary tax competition. It’ll move a small number of people and a large amount of profit.”

Labour tax plans

On Tuesday Labour announced a plan to tax hedge funds, owners of expensive homes and the tobacco industry.

Chris Leslie, shadow chief secretary to the Treasury, who is leading Labour’s spending review, didn’t reveal any new tax or spending plans.

The message was the now familiar one of “difficult challenges and problems” and a “fair approach to deficit reduction”.

Possible changes to government finances could include giving departments multi-year rather than single-year budgets and “de-cluttering” public services to save costs and better procurement, Leslie said.

Asked about Labour’s plans for a ‘mansion tax’ on properties worth more than £2m, Leslie said: “Our view is that people who are particularly capital rich should contribute a greater share. The principle is an important one. In some parts of London property traded as commodity and not even let out [before being sold]. I think the mansion tax is legitimate [although] it won’t be popular in some privileged quarters.”

Some tax experts have said the tax may not raise as much money as Labour expects.

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