Economists attack Conservative party proposals to ban tax rises

Economists on Wednesday hit out at Conservative proposals to ban tax rises until 2020 as undermining Britain's fiscal credibility and leaving little flexibility to deal with shocks over the next five years.

After the suggested new law in the event of a Tory victory, there would be little scope left to raise revenues, suggesting any unexpected economic weakness would require higher borrowing or even deeper spending cuts.

The proposal to ban tax rises comes as the government's independent forecaster warned that the deficit would be unlikely to fall if the weak growth recorded in the first quarter became the norm.

David Cameron said on Wednesday that the plan to ban rises in the main rates of income tax, value added tax and national insurance showed that "it's Labour who put up your taxes, and the Conservatives who cut them".

Legislating to put this commitment into the programme of a new government was criticised heavily by economists, some of which are often quoted favourably by Conservative politicians.

Michael Saunders of Citi said: "I don't think it is very sensible. It is either a slippery snake-oil salesman sort of thing, ruling out certain tax rises but leaving plenty of scope to raise taxes in other areas or, if real, it reduces your fiscal credibility because you want the ability to raise taxes if your most important objective is to eliminate the deficit".

George Osborne relied on similar sentiments from Mr Saunders in 2010 when criticising the last Labour government's proposal to enshrine halving the deficit in law. The chancellor called Labour's 2010 Fiscal Responsibility Act a "feeble stunt" and "the biggest load of nonsense that this government have had the audacity to present to parliament in this session".

Economists do not doubt the Conservatives' ambition to refrain from raising taxes, but worry that a Tory government would limit itself to a policy that might run counter to the national interest.

Jonathan Portes, director of the National Institute of Economic and Social Research, said: "The charitable explanation is that it's completely vacuous and doesn't add anything to the pledges already made by the Conservatives, but the potential danger is that it removes the flexibility to adjust tax if things don't turn out as we hope or expect".

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If there was persistently lower growth, the Conservatives would have few remaining options for raising taxes because the pledges cover measures that raise more than two-thirds of total tax revenues, the economists said.

Paul Johnson, director of the Institute for Fiscal Studies, said: "This is 70 per cent of revenues. It makes it even more likely [a Conservative government] would do silly things - screw up pension taxation even more, look at corporation tax and tax avoidance - it really doesn't leave anything except opaque hidden stuff".

But in opposition to the general consensus, Mark Littlewood, Director General at the rightwing Institute of Economic Affairs think-tank, said: "Taxpayers should be aware of what this pledge doesn't cover. There are already substantial increases in highly regressive duties pencilled in for the next parliament as well as large increases in stamp duty revenues".

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