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Schroders says tax rises are inevitable

Tax increases are on the cards whether Labour or the Conservatives win the general election, says Schroders.

The fund company says an honest campaign slogan for both parties would be: “Vote Labour for tax increases in 2006, vote Conservative for tax increases in 2007.”

Labour’s spending plans include a 40 per cent increase in Government expenditure over the next term while the Conservatives have outlined a 33 per cent increase. Tory spending plans are offset by cost-cutting measures which are claimed to save 35bn – around 5 per cent – from the current Government budget.

Schroders European economist Richard Batley says the Treasury’s projection of forward tax revenues looks unrealistic, given that UK and glo- bal GDP growth is expected to slow over the next few years. This means tax rises are inevit- able or the public sector deficit will grow markedly.

He believes the most benign election outcome would be a Labour victory because of the market’s confidence in Chancellor Gordon Brown.

However, Batley says the current strength of the economy – the roots of which were put down when the UK left the exchange rate mechanism in 1992 – is not down to party politics as both the major parties supported the same policies.

Batley says: “Both the Conservative and Labour parties supported entrance to the European Monetary Union. The improvements in the various macroeconomic variables experienced since 1992 are therefore perhaps best characterised as having happened despite the economic policies of both major parties, not because of them.

“The reduced rate of spending increases outlined by the Conservatives may limit the degree of tax increases required to keep public finances on a long-term sustainable trend but it does not preclude them.”

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