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Although the coalition
agreement between the Tories and the Lib Dems covers a broad range of policies
(in a pleasingly concise 7-page document), everyone involved in the new
Government has been pretty consistent about the over-riding priority: tackling
the UK's massive budget deficit and rising national debt. While this will
inevitably mean huge cuts to public spending - almost £60bn a year by 2013/4,
according to the FT - it will also mean tax hikes. We've already seen some of
these - capital gains tax is going up, while the employees' NI increase won't be
reversed after all. But a VAT hike is also looking increasingly likely; a BBC
poll of top economists today reveals that most expect it to rise, possibly to
20%. As far as the Government is concerned, it probably looks like the least
worst option...
Messrs Cameron, Clegg and Osborne have already been at pains to stress the scale
of the task that faces them - 'the worst financial inheritance of any government
in peacetime,' the new PM called it yesterday. And now they've got their feet
under the table in Number Ten, the coalition partners will finally have to start
coming clean on how they plan to start reducing the deficit. According to
today's FT, the Treasury has already budgeted for annual savings of £37bn - but
the new Government will need more than that to meet its targets. The Pink' Un
reckons that it will have to find £57bn a year of cuts by 2013/14, more than a
fifth of the £260bn public spending budget. There's no way this can be achieved
without a substantial degree of pain. (And it could be worse, if the Government
revises down the current growth forecasts).
Inevitably, tax increases will fund some of this (probably about 20%). The
Government may have sensibly reversed the unpopular employers' NI hike planned
by Labour. But employees' NI is going up, while capital gains tax is being
raised to 40%, to bring it more into line with income tax (though apparently
there'll be an exemption for entrepreneurs). However, raising VAT would be an
even bigger earner: analysts reckon a hike to 20% would bring in an extra
£11.5bn a year. And of all the potential tax rises, it's probably about the
least controversial politically. No wonder, then, that 24 of the 28 economists
polled by the BBC (all of whom are used as consultants by the Treasury) are
expecting VAT to rise in the current Parliament - or that the majority expect
the rise to be to 20%. Expect a marked upturn in the cash economy if that
happens...
We all know what’s coming, and we all know it’s going to hurt. So the sooner
they get on with it, the better. In the meantime, they should enjoy their
new-found popularity while it lasts. After the Emergency Budget, it could be a
very different story.
Source:
Reuters,
UK, dated
13/05/2010
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