50p tax cut estimates ‘uncertain’ say MPs
Estimates used by Chancellor George Osborne to justify axing the 50p top tax rate are “highly uncertain”, an influential group of MPs has warned.
The Treasury Select Committee have challenged the Chancellor’s assertion that the cost of reducing the top level of tax to 45p would be £110m. They concluded that the impact “could be significantly more or less”.
The conclusions came in the MPs’ report into last month’s Budget.
Referring to the controversial decision to reduce the levy on earnings above £150,000, the committee said: “The cost and benefits of reducing the additional tax rate to 45p are both highly uncertain, and could be significantly more or less than the cost included in the Budget.
“We recommend that HM Revenue & Customs publish in due course a comprehensive assessment of the effect on the Exchequer of the new 45p rate.”
It also urged the Government to offset the pain that quantitative easing – the policy of pumping cash into the economy – is causing savers, and suggested that ministers had so far failed to make the case for capping tax relief on charitable donations.
Speaking to the committee, Robert Chote, director of the Office of Budget Responsibility said it was “an heroic exercise to try and disentangle” the forestalling effects and other effects of the tax changes.
The 50p top rate of tax for people earning over £150,000 was announced by Alistair Darling in 2009, but it didn’t come into effect until 2010.
This left time for dividends to be paid before being subject to the top tax rate – an entirely legal way of tax avoidance for high earners.
An independent estimate for Channel 4 News in March suggests that up to £20bn may have been paid pre-emptively, which would otherwise have generated £2bn for the exchequer.
The committee was also concerned about the wider impact of other fiscal measures.
The MPs called for more information on the effects of the £325bn of new money effectively “printed” by the Bank of England, pointing out that some sectors of society have been particularly hard hit by the bank’s policy:
“Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with ‘drawdown pensions’ and those retiring now,” the report said.
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The Tory-led committee went on to suggest that the government might want to act to compensate the losers:
“We recommend that the government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing, and if appropriate consult on them at the time of the autumn statement.”
Downing Street said that quantitative easing was “a matter for the Bank of England”.
A No 10 spokeswoman said: “Fiscal credibility in the UK is, and has been, hard-earned… by sticking to our plans, by reducing public spending, by monetary policy action. That in itself has created low interest rates for the long term and contributed to the fact that the UK maintains its safe haven status.”
But coming after days of critical headlines over the granny tax, the pasty tax and other budget measures, this latest report will not make pleasant reading for the Chancellor.