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Additional tax increases of around £25 million could be an effective measure to help handle the deepening recession, suggests a new report from PricewaterhouseCoopers (PwC).
The paper – entitled Dealing with Debt - Reforming Public Services and Narrowing the Fiscal Gap – estimates that by 2013-14, the UK will be facing an estimated fiscal gap of around 3% of GDP (equivalent to about £43 billion at today’s values), and it outlines two tax-and-spending options as illustrations of methods handling the economic situation.
The first option is a real reduction in total public spending of 1.4% per annum, in the three years to 2013-14.
This would avoid the need for additional tax rises, but the scale of public spending-restraint involved would be unprecedented historically and would require even larger real cuts in Government departmental spending, given fixed commitments on debt interest and many social security benefits.
The alternative is a real freeze in total public spending in the three years to 20130-14, supplemented by around £25 billion of tax increases from 2011 onwards, over and above those announced in November’s Pre-Budget Report (PBR).
This, says PwC, seems the more realistic spending option, although the company’s report estimates that the move would still imply real cuts in departmental spending of around 1% per annum.
Assuming modest rises of around 0.5-1% per annum in real health and education spending, other departments might need to find average real cuts in spending of around 3% per annum in this second scenario.
PwC’s head of macroeconomics, John Hawksworth, said: ‘We think the Government should aim to restore the current budget to balance by 2013-14, rather than waiting until 2015-16 to achieve this target, as the PBR projections indicate’.
He added: ‘There is no easy way to fill the fiscal gap. It is likely to require a combination of severe public spending restraint in the next Comprehensive Spending Review period, alongside significant tax increases in 2011 and beyond, over and above those set out in the PBR’.
