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Today's number: Eight billion

I don't like to reduce the hard work of the much respected and to a single number. Their annual Green Budget is after all 299 pages long. (It is nothing to do with environment incidentally, it's green in the sense of a green paper).

Twenty pound notes and coinsBut I know that most of you will not be reading those pages, and good journalism is often about boiling things down.

So I'm happy to boil down the green budget into one number: 拢8bn.

That's the tax rise needed by spring 2009.

The tax rise is required for the Chancellor's self-imposed fiscal rules. He needs it to ensure he meets his sustainable investment rule. And also to get the key measure of borrowing into surplus (the current balance, the measure used to assess the "golden rule".)

The IFS did not advocate tax rises last year, but over the course of 2007 it's become evident that the government's finances are far shakier than former Chancellor Gordon Brown expected at the time of his last budget.

In fact, the books now look 拢7bn worse than a year ago. And that, it should be said, occurred before any economic slowdown had time to bite. Corporation tax and stamp duty revenues have already been disappointing.

So what's to be done?

Well, the Institute for Fiscal Studies is the most respected source outside of government on the public finances - and in recent years has had a rather better record than the at predicting the need for extra money.

Each year it looks at the books, and today it said it thinks taxes need to go up by that 拢8bn, or the equivalent of about two pence in the pound on income tax if the economy performs more or less as Alistair Darling expects.

If the economy takes a serious dive, vastly more will need to be done.

This may not seem like a great time to hit households with extra tax - after all, the American government is allowing itself to borrow more in order to stimulate its economy.

But the IFS suggests that interest rates should be left to do the work of stimulating the UK...while the government needs to sort out its fiscal position.

In fact, the best reading of the IFS work is that the re-balancing that needs to occur for consumers - who will probably need to save more and borrow more carefully - applies also to the government.

The Chancellor and his predecessor have allowed themselves to assume that in years ahead, the good times will roll and money will flow in to the exchequer.

In fact, it seems the good times have just passed. That means both households and government have to adjust their expectations and spending accordingly (hence the impending economic slowdown).

It's just unfortunate, if the IFS is right, that the consumer and government cycle are so well synchronised. It might have been preferable for the two to be offsetting each other in the economy cycle, not supporting each other.

The real budget is expected in March - the Chancellor can update us on his thinking.

So far, the government has recognised that its medium term fiscal position needs some attention and has been restraining the growth of public spending as a result. But the IFS makes clear, a whole lot more needs to be done on top of that.

It's worth stressing that having boiled the IFS Green Budget down to an 拢8bn tax rise, that's not a prediction of what will happen - just their statement of what ought to happen.

Comments   Post your comment

  • 1.
  • At 12:18 AM on 31 Jan 2008,
  • Bruce Robertson wrote:

It's just unfortunate, if the IFS is right, that the consumer and government cycle are so well synchronised.

It's not unfortunate, it's been this government's policy - for which it should be held accountable.

  • 2.
  • At 01:25 AM on 31 Jan 2008,
  • Gurj Shergill wrote:

This will come as no surprise to many who have been following the fiscal situation over the past five years. The government has been boasting about its record regarding growth and inflation, despite the fact the stability was in no small part down to the benign global economy.
Warnings from the IMF and others about taxation and public borrowing levels weren't heeded and now there is little wiggle room for the new chancellor to aid the Bank of England in trying to stave off a recession in the UK.

  • 3.
  • At 02:12 AM on 31 Jan 2008,
  • Simon Allen wrote:

Thanks for the 'heads up' on this although it is no surprise as Mr Brown started his period as Chancellor by saying, "No more boom and bust". In those five words, he proved that he did not understand human nature and that another boom and bust cycle was inevitable.

He then made the mistake of postponing the bust long enough to be in No.10 when it happens. So - what's to be done?

If the Northern Rock problem is anything to go by, he (and the man in No.11 with the title 'Chancellor') will fudge and futs around, trying to have their cake and eat it. In the end, the tax will have to be increased or the spending decreased. Unless, I know, why don't we change the rules we made and borrow some more?

  • 4.
  • At 03:06 AM on 31 Jan 2008,
  • Fenny wrote:

Is this the same 2p that Mr Brown announced he would be cutting off income tax in the last budget, or a real increase of 2p? I always thought a tax cut was a little optimistic, even before the current economic problems.

  • 5.
  • At 06:20 AM on 31 Jan 2008,
  • Jos wrote:

The fiscal rules are measured over the cycle and isn't there an assumption In here that the cycle ends around 2010? If we are heading into bad times then is it not clear that the cycle peaked in 2007?

I wonder if there is a mismatch between the reality of the cycle and the exigencies of statistical measurement. If so then the rules need to be reviewed.

The automatic stabilisers should be allowed to act freely, ie government borrowing should increase in the downturn, and if the rules get in the way then the rules need to be reconsidered.

  • 6.
  • At 07:27 AM on 31 Jan 2008,
  • Theo Georgiou wrote:

So from the analysis it looks like we will have an increase in taxation (might not be all 8bn) and the most likely way is through stealth taxes and not through changes on the basic rate of income tax. Very likely the thresholds for the 20 and 40% will change very little so as to increase revenue and some other "green" tax either in the air travel or on petrol in addition to what we have now. Whatever happens the story is not good for the middle england worker.

  • 7.
  • At 07:37 AM on 31 Jan 2008,
  • Charles wrote:

Isn't this typical 大象传媒-think? The government is over spent by 拢8,000,000,000 so raise taxes? Why not reduce the overheads? An easy place to start would be with the labour bloated, Labour voting, tax payer funded, employees with their gilded pensions, paid away days, binge-bonding sessions and penchant for taking sickees. Labour voting ... oh, I get it.

  • 8.
  • At 10:00 AM on 31 Jan 2008,
  • Bebedi wrote:

The problem with Darling is he has nothing to work with. When times were good our Mr Prudent did nothing to redress the balance and now there isn't much wriggle room left. To compound matters revenues from the slowing housing market and general slowdown will add to this predicament. What does he come up with? He asks the departments to identify more assets that can sold after having emptied the gold coffers and raided the pensions. SOS....Mayday...Mayday...we are in trouble.

  • 9.
  • At 10:06 AM on 31 Jan 2008,
  • Robin wrote:

There is no coincidence in the fact that the government has left us so exposed as the economy turns soft; it's their own design. Gordon Brown became fiscally incontinent the moment he decided to alter the length of the business cycle. This will go down in history as one of the biggest acts of hubris on record. Sadly, it seems to be a recurring feature of UK Chancellors that they get punch drunk on their own success.

However, one thing is clear; his belief that HE alone decides when the business cycle begins and ends reveals the contempt in which he holds the business community who create the wealth in the first place.

The next phase of this government's fall from grace wil be the ebbing away of support from businesses who've been taxed over and over again to pay for their excesses.

  • 10.
  • At 10:09 AM on 31 Jan 2008,
  • Simon Pearce wrote:

It's a sign of the establishment's intellectual sterility that its only response to a budget deficit is an 拢8 billion tax increase - and during a recession at that. What about cuts in public spending? 拢8 billion is a mere fraction of the Government's total disrectionary budget so let's not have the usual knee-jerk warnings about 'savage cuts'.

  • 11.
  • At 10:40 AM on 31 Jan 2008,
  • Edmund Price wrote:

A very clear analysis; makes common sense too. No doubt the government will find a way to present its fiscal position differently though.

  • 12.
  • At 10:46 AM on 31 Jan 2008,
  • James Maxwell wrote:

I completely disagree with the analysis in the green report, and Evan Davis's apparent agreement with it.

Too many commentators look at the government's budget situation and call for yet more taxes in a knee jerk manner.

This is already one of the most highly taxed populations on the planet... and for a disproportionately low return.

Focus should rather be on the three virtues of reduced spending waste (which is massive under this administration); proper and determined recovery of taxes due (by closing loopholes, agressively pursuing tax dodgers, and properly funding the tax collection end of HMRC); and reducing welfare spending - by showing a bit of spine in getting people who have no excuse to be unemployed back to work (or even to work for the first time ever).

Ordinary middle class people are the ones who bear the brunt of new taxes (followed only by the poor, never the rich). This country needs to relentlessly focus on creating an environment where the hopes and aspirations of the middle classes are fulfilled - this will lead to ever greater tax returns to the fiscus as people generate more wealth, greater prosperity and happiness, and an increased ability to compete for talent against other countries.

At the same time, focus should go on uplifting the poor through access to meaningful employement opportunities and the chance to aspire to a better life. Perhaps this could be achieved through promotion of a cultural view where being unemployed carries a social stigma within communities, rather like drink driving.

Only in this way will government address the long term fault lines in our society and in our economy. The question is whether any set of politicians will have the imagination or bottle to make the attempt - I certainly see no signs of it from the current lot.

  • 13.
  • At 10:50 AM on 31 Jan 2008,
  • AHilton wrote:

Of course we can expect Mr darling and Brown to squeeze more out of the motorist and hike up the tax on fuel. That seems only right and fair, doesn't it? Especially as the oil companies are struggling and they, and the governement, are not benefitting at all from the over-inflated oil prices.

Brown's "prudence" is really paying dividends to the government and the UK!

  • 14.
  • At 11:15 AM on 31 Jan 2008,
  • wrote:

A nice windfall tax on the banks and the drinks companies would soon bring that in and would mean that industries which cause some of society's problems were paying to address them.

  • 15.
  • At 12:11 PM on 31 Jan 2008,
  • David Comerford wrote:

This is where BoE independence becomes a disadvantage: what's needed at the moment is some co-ordination between monetary and fiscal policy. For example, if we're currently heading into an economic downturn, then the last thing that should be done is cutting government spending. However, to maintain current levels of spending, tax rises are necessary - which is also a bad idea as we head into the economic downturn. Therefore, interest rate cuts could be used to offset tax rises while keeping spending constant - this would currently require the Chancellor to raise taxes by equivalent of ~2% on income tax while at the same time getting the Govenor of the BoE to agree to massive (e.g. to ~1%) interest rate cuts.

I also don't think the government should be averse to printing (rather than borrowing or taxing) its spending money in these sort of times. This could be justified as counteracting the monetary contraction caused by lenders potentially refusing to roll over their loans and calling in their debts.

  • 16.
  • At 12:25 PM on 31 Jan 2008,
  • Simon R wrote:

Can anyone answer the following question that I have asked the procession of government employees who visit me at work in relation to the latest beaurocratic nonsence. They tell me that it does not matter where goods are produced and we must outsource to take advantage of a lower currency and regulatory burden abroad.

"Now we hardly have any manufacturing or farming left, how will my children be able to pay your lavish pension when you retire at 55?"

Answers on a postcard to Gordon "Mr Debt" Brown at Scotland House, 10 Downing Street.

  • 17.
  • At 12:28 PM on 31 Jan 2008,
  • Robert Woodfield wrote:

Absolutely no chance or sense in Darling/Brown filling that 拢8bn gap in the short or even medium term. Are all the Neo Keynesians at the IFS hung over on Davos gluehwein or have they sold out to the Ultra Monetarists?!!
With Redwood/Duncan-Smith if not yet Cameron axis promising "to roll back the frontiers of the state" Labour will not want to be accused of swingeing Tory style public expenditure cuts!Trebling the perennial 2p+ on petrol/diesel etc., will go down with like a lead balloon for UK businesses & domestic consumers wrestling with 15% hikes in gas & elec. prices. Darling will have to ask his predecessor for his/the Treasury's 'Best Conjuring Tricks' manual if the markets continue to have the jitters despite a Federal Reserve cull in interst rate of 1.25 points in as many weeks already this year. Even an ECB rate cut let alone something significant soon from the BoE MPC is clearly today's 'no brainer'!!!

  • 18.
  • At 01:12 PM on 31 Jan 2008,
  • Jo wrote:

Many sensible comments, especially about cutting spending (NHS waste anyone?).

How about considering the Laffer curve? If we need to increase the tax revenue, a reduction of rates could increase the revenue generated from tax.

However, government (and especially Labour!) thinking is that in order to increase revenue you need to increaes tax rates. It's just another symptom of politicians believing they have to control as much as possible of wealth creation and spending. No wonder more and more people "blame the state" for their personal choices/mistakes!!

  • 19.
  • At 01:44 PM on 31 Jan 2008,
  • Bob wrote:

Evan

This line of thought ties in with Alan Greenspan thoughts on the US economy and fiscal policy since 2002.

Tax revenues from booming stock markets put government finances into surplus. They missed the volatility of this revenue stream in projections to 2010.

Based on inflation and normal rates of increase in productivity in the US about 3% a year interest rates are effectively 0 there.

That's got to a recipe for inflation? Might as well print money.
Perhaps the FED got signs of a deflationary spiral being created. That would really hurt.

  • 20.
  • At 03:10 PM on 31 Jan 2008,
  • Mev wrote:

For goodness sake Evan, keep your voice down! The last thing we need is for Labour to the get the idea of tax increases into their heads!

Sadly though, that might be the only way to avoid an increase in public debt. Seems to me that years of inflated spending, waste, raiding of pensions, the war in Iraq and the debacle of tax credits costing billions a year (and much more), have left us all in a very vulnerable position.

With the cost of living increasing exponentially (gas, electricity, council tax, mortgage payments, fuel), the last thing households need is an increase in taxes - stealth or otherwise. Yet, it all comes down to Labour doing what Labour does best.

It seems to me that it was not just UK citizens that were living off of credit, but Gordon Brown too.

Here's to the next general election...

  • 21.
  • At 03:18 PM on 31 Jan 2008,
  • orangatang wrote:

Hmm, how could the treasur raise 8 billion without raising taxes or cutting spending. let me see....

RAISE THE RESERVE REQUIREMENT FOR BANKS!


job done

  • 22.
  • At 10:32 AM on 01 Feb 2008,
  • bears all wrote:

Evan is spot on when he writes, "The Chancellor and his predecessor have allowed themselves to assume that in years ahead, the good times will roll and money will flow in to the exchequer.

In fact, it seems the good times have just passed. That means both households and government have to adjust their expectations and spending accordingly (hence the impending economic slowdown)."

Brown really did believe that he had put an end to "boom and bust", that he could borrow to spend in the short term and pay it all back some time in the future when an ever-expanding economy would provide a steady stream of revenue. How naive.

I don't think you can blame Evan for reporting that the IFS says Brown needs to raise 8bn in tax; he might however have posited the alternative - that Brown might look for 8bn of spending cuts.

  • 23.
  • At 02:12 PM on 01 Feb 2008,
  • Stephen Wyman wrote:

In my view all the Chancellor has to do this year is place a windfall tax on oil & energy companies of 拢8 Billion.

As they are partly the cause of the inflationary pressures that are keeping interest rates up and are reaping the windfall profits from the high market prices for energy.

So let the industries who are gaining from everyone elses woe balance the governments books and not the poor old taxpayer.

  • 24.
  • At 09:58 AM on 04 Feb 2008,
  • Anthony Steed wrote:

The best analogy of the UK's fiscal position was something I heard on Radio 5

"We've used up all of the asprin, but still have the headache"

  • 25.
  • At 09:02 AM on 05 Feb 2008,
  • david wrote:

There's nothing clear about economics. For instance, are we talking about 8 milliard here, or 8 billion? There's quite a difference!
By obfuscating the numbers themselves, all talk about fiscal policy is made meaningless.
I'm sure the 大象传媒 will talk about trillions one day and we'll be expected to know they mean billion.

  • 26.
  • At 01:02 PM on 05 Feb 2008,
  • Danny wrote:

erm, Fenny #4, what 2p reduction in income tax?

  • 27.
  • At 11:32 AM on 06 Feb 2008,
  • wrote:

the government should increase taxes on cars and petrol. It will solve 3 problems at once.

1) reduce budget deficit
2) reduce carbon emissions
3) reduce congestions

(I do drive a car btw :) )

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