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IFS: HMRC 50p review “too narrow” for proper assessment

The review commissioned by the Treasury into the 50p tax rate will not be enough to make a proper assessment of whether to cut it or not, according to the Institute for Fiscal Studies.

Chancellor George Osborne asked HMRC to look into the tax and its effects on revenues last year, HMRC is expected to report back soon. Last month, it was reported Prime Minister David Cameron considers it unlikely the tax will be cut in the near future because of the political implications.

In a new pre-Budget assessment of Government finances, the IFS says although reforming the tax system to promote long-term growth should be high on the Government’s agenda, the Treasury should not rush into any decisions over cutting the 50p tax rate.

IFS director Paul Johnson says the Treasury’s previous analysis suggests that a “very considerable degree” of behaviour change, avoidance and evasion is caused by the 50p rate and that only considering its impact on revenues is too narrow a basis for making an assessment.

The report says better than expected tax receipts are likely to reduce borrowing by up to £9bn more than the £24bn currently projected by 2017, but the risks posed by the eurozone mean the Government should continue its fiscal consolidation.

In its Green Budget, published this morning, the IFS also echos warnings from the Office of Budget Responsibility’s warning that should the eurozone break up the Chancellor’s austerity measures could be knocked off course.

Johnson says: “The Chancellor faces his third budget with the economy and public finances in considerably weaker shape than he had hoped a year ago. While it looks as though central government is going to underspend against tight spending plans, this does not leave much space for any permanent fiscal loosening.

“But he needs to get other policy decisions right. The tax system needs reforming to help promote growth in the medium and long run. Ill thought out plans for withdrawing child benefit from higher-rate taxpayers need to be revised and time needs to be taken if real evidence of the effect of the 50p income tax rate is to be gathered.” 

Labour says the Government’s “catastrophic” economic policy is hitting growth and forcing the Government to borrow billions more than it had planned to make ends meet.

In its October Economic and Fiscal Outlook, the the OBR said the economy would grow by 0.7 per cent in 2012 and 2.1 per cent in 2013 before rising to 3 per cent in 2016. It said the upward trajectory of the numbers was dependent on the politicians finding a solution to the sovereign debt crisis. It said public borrowing will be £127bn in 2011, £120bn in 2012, £100bn in 2013, £79bn in 2014, £53bn in 2015, and £24bn in 2016.

The report says that by the end of 2011/12 just 6 per cent of the “unprecedented” planned spending cuts will have been made. It adds: “Even once the immediate fiscal repair job is done, further hard choices over tax and spending are likely to be needed.


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