Taxes and benefits

This presentation was delivered at the IFS 2010 Election Briefing on 27 April 2010.

Today's GDP figures show that the economy grew by 0.2% in the first quarter of 2010. In the election campaign much has been made of the impact of the timing of spending cuts and tax increases on the ability of the UK economy to sustain this recovery. This is an important issue, but much less attention has been given to the equally important question of how UK growth is likely to fare in the medium term which will be largely determined by efficiency with which we produce goods and services and the extent to which we develop new ideas.

Sensibly, there is general agreement between the three main parties on the need to tackle the large rise in youth and long-term unemployment caused by the recession, and all parties have policies to help deal with the high number of people who are out of work and receiving disability benefits. Today, the IFS publishes an analysis of the welfare and back-to-work policies proposed by the three main UK parties for welfare reform.

The Liberal Democrats propose to increase the income tax personal allowance to £10,000 while keeping the level of income at which people start to pay the higher rate of tax unchanged. They say this giveaway would cost £16.8 billion in 2011-12. They also propose a set of significant tax-raising measures, but do their plans add up?

The Liberal Democrats have, once again, claimed that the poor pay more of their income in tax than the rich, and that this gap has got larger under Labour. But, by ignoring the fact that the poor get most of this income from the state in benefit and tax credit payments, and by overstating the extent to which indirect taxes are paid by the poor, this comparison is meaningless at best and misleading at worst.

This presentation was given to a CERGE conference in Prague, April 8th 2010.

This presentation was given at the Paris School of Economics on April 1st 2010.