David Miliband has rightly been commended for setting out some detailed economic policies to tackle the deficit, including his optimal 2:1 mix of spending cuts to tax rises.
But he has also been criticised for tacking to the left. Danny Finkelstein even argued “he wants to raise tax by 60 per cent more than the Coalition intends”.
While there’s some truth to Miliband wooing the left by targeting the rich, he’s not pushing for a higher overall tax burden. Finkelstein’s analysis is wrong.
Miliband did endorse the idea of a mansion tax and ending VAT perks for private school fees, at least as an alternative to a rise in VAT. (There is no doubt a whiff of panic in this.)
But Miliband would not need any extra tax rises at all to achieve his ratio of £2 of cuts to £1 of tax rises. He’s merely sticking to the path Alistair Darling set out in the Budget.
Darling pencilled in around £18bn of tax increases up to 2014/15, which covers around a third of Labour’s £51bn planned consolidation.
Some fiscal hawks in the Treasury, as I’ve written before, actually think even this 2:1 mix is a stretch. They think the spending cuts are undeliverable and damaging; a tax hike is a much more reliable and quicker way of raising money.
As this chart of the tax/gdp ratio shows, past Tory chancellors facing a big deficit have usually succumbed to this argument.
They are still sounding reasonably confident about a 4:1 mix. But the coalition document actually watered down the policy, saying only that the “main burden” of the deficit reduction should be borne by cutting spending.
So, in theory, its possible the coalition could end up with an even more tax heavy deficit reduction plan than Miliband. It’s unlikely to be the case in the first Budget. But if after the Autumn they find the spending cuts to be harder to achieve than expected, I won’t be surprised if Osborne reverts to a 2:1 path.
*Alesina, A. and R. Perotti (1995), Fiscal expansions and adjustments in OECD countries, Economic Policy, 10, 207-248
Jim Pickard
Kiran Stacey