Where could spending axe fall?

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We have been told painful public spending cuts are on the way, but where should the axe fall?

How would you deal with the deficit?

That is the question Prime Minister David Cameron's government has posed to the British public as they seek to plug an estimated £71bn black hole in the nation's finances.

Here is how your taxes are currently raised and spent.

How things might look in years to come will depend on the decisions made by Chancellor George Osborne's in his forthcoming emergency budget and spending review. Below we set out in detail some of the tax and spending choices the country faces.



Some experts have predicted the government will increase VAT in its emergency budget.

Cash raised

About £11bn a year, if it is increased from the current level of 17.5% to 20%, according to Credit Suisse.

Political risk

The easiest and quickest way to raise a lot of money, but it comes with economic risks. It would push up the inflation rate, potentially forcing the Bank of England to put interest rates up. It was not proposed by either the Conservatives or the Lib Dems in their election manifestos either, although David Cameron has refused to rule it out. Business Secretary Vince Cable would be forced to explain why he had changed his mind, after speaking out against increasing the rate before the election.



A range of benefits could be frozen in George Osborne's emergency budget.

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Freezing all benefits could raise about £15bn over three years. Axing child benefit for better off families could save £1.3bn a year. Taxing the winter fuel allowance for better off pensioners, in line with proposals in a select committee report last year, could save £250m a year. Axing it altogether would save £2.7bn a year.

Political risk

Freezing benefits across the board would raise a lot of money quickly but hit the poor and most vulnerable the hardest - something the coalition has pledged to avoid. Ministers could, alternatively, enact the Liberal Democrat policy of axing child credits for couples on a joint income of more than £26,000. Means testing the winter fuel allowance is another option, although the BBC understands this is not being considered.


Pen and calculator

The biggest single contributor to the exchequer's coffers - and a perennial source of extra revenue for cash-strapped chancellors, particularly in the year after an election.

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Putting 1p on the basic rate of income tax would raise about £4bn a year, according to the Institute for Fiscal Studies (IFS).

Political risk

George Osborne would find it very difficult to increase the basic rate. A less headline-grabbing alternative would be to reduce tax relief for high earners saving for their retirement, although they have already been clobbered by measures in Alistair Darling's last budget and business groups have been protesting it will drive wealth creating talent from the UK. Mr Osborne is expected to change personal allowances to help the low paid, in line with Lib Dem policy, to be paid for by changes to capital gains tax.



The budget will confirm that most of next year's planned increase in National Insurance will not go ahead. Plans to increase it by 1% for employees are likely to go ahead but the same increase for employers' NI - dubbed Labour's "jobs tax" by Mr Cameron - is to be shelved.

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Increasing National Insurance by one percentage point raises £8.8bn a year in extra revenue, according to the IFS.

Political risk

Could raise billions at a stroke but would hit Tory-voting high and middle income workers.



Non-business capital gains tax, which is levied on the profits made by individuals when they sell second homes, shares or other assets, is set to be increased from 18% to 40% or 50%.

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Hotly disputed. Some accountants argue that it could be as low as £500m a year, if it is tapered to prevent penalising long-term investors. The Lib Dems, who proposed it, say it would raise about £1.9bn a year, although this would be used to pay for the planned increase in personal tax allowances rather than to pay off the deficit. Some Tory MPs argue it could actually cost money, as collection rates fall.

Political risk

It is already in the coalition agreement so will not come as a surprise. The only question is whether Mr Osborne will taper it to soften the impact on long-term investors. If he does not he could face a backbench rebellion from Tory MPs who see it as a tax on entrepreneurs and people saving for their retirement. The Lib Dems say increasing CGT to the same level as income tax is essential to make the tax fairer.


Sunrise over an oil refinery

The budget is expected to adopt Lib Dem proposals of switching from a per-passenger air duty to per-plane, but as with capital gains, the reform will help to fund an increase in the personal allowance.

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None from the air tax changes (see above). But further green taxes could be included in the budget.

Political risk

The coalition has called for a higher proportion of tax revenues to come from environment taxes, although any move to increase fuel duty beyond that already announced by the previous government would spark an outcry.


Bin man

The government has already committed itself to a public sector pay freeze for all but the lowest paid workers next year. The budget could extend this policy.

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The CBI claims selected public sector pay and recruitment freezes could save £18bn in the next two years.

Political risk

The government is doing its best to keep public sector workers onside by trying to involve them in deciding where the spending axe will fall but, with inflation running at 5%, a pay freeze would amount to a cut for many workers and could spark industrial action.


Cranes on skyline

The government is committed to a number of expensive long-term projects including new London rail network Crossrail, a high speed rail network and replacing Trident nuclear missiles.

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The government is reported to be considering making up to £5bn of cuts to the £16.9bn Crossrail scheme. Delaying the £20bn Trident upgrade would save a lot of money. The Lib Dems have been promised a "value for money" review of the project.

Political risk

The Conservatives could not afford to be seen as going weak on defence, although delaying Trident would please the Lib Dems. Crossrail looks more vulnerable.



Health is the only area of spending - apart from the relatively modest international development budget - that has been protected from frontline cuts, although the NHS will have to make 3% efficiency savings and IT projects have been axed.

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The NHS annual budget is £106bn. Some experts say it is nonsense to suggest further savings cannot be made from it.

Political risk

Protecting the NHS from cuts was a key Tory election pledge - but the Lib Dems argued it should not be ring-fenced, which could provide some cover if Mr Osborne decided to rein back its budget.


Exam hall

Core school budgets, 16 to 19-year-olds and Sure Start will be protected but many additional services could be facing the chop, particularly if those providing them work for local authorities or quangos.

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Savings of £670m have already been announced by scrapping the new primary curriculum and axing quangos, among other things, but this is a drop in the ocean compared with the savings that are likely to be made over the next few years from the £63bn annual education budget. The teachers' final salary pension scheme, which costs about £10bn a year, could be one casualty.

Political risk

Care will be taken to avoid anything that impacts too obviously on children's education. The government's plans for academies and free schools will also be a priority. But it may be hard to avoid protests if local services for children and youths are cut.


School crossing patrol

Local government is likely to come under pressure to save money by outsourcing services or handing them over to voluntary groups. Leisure services, residential care and public libraries are among the budgets thought to be in the firing line. Charges could be introduced for other services such as recycling and home help. Conservative plans to freeze council tax for two years also appear to have been dropped.

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Local councils are already being forced to shed up to 300,000 jobs and staff pensions and benefits face a squeeze. But the £35bn spent annually on local government is still likely to come under further pressure.

Political risk

Huge public sector job losses could damage the economy in some parts of the country. Popular local services could also suffer.


British army

Defence spending is protected in the current year but a full Strategic Defence Review is expected to recommend deep cuts when it reports in November. The army could be cut from 98,000 personnel to about 80,000, according to press reports, and orders for new fighter jets and other equipment scaled back, although the government remains committed to replacing Trident nuclear missiles.

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In addition to anticipated manpower cuts, the Ministry of Defence is set to review about 20 equipment procurement projects, worth £10bn in total, according to media reports.

Political risk

Cuts to the nation's defence capability are likely to meet heavy resistance from the Conservative benches. With so many British troops committed in Afghanistan, it is also an emotive subject for the public.


Pensioners by seaside

The coalition government has announced a review of the retirement age. Under current plans, it is due to rise from 65 to 66 from 2024 but the Conservatives have said they want this change to happen from 2016 for men and from 2020 for women.

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Adopting the Conservative proposals would eventually save £13bn a year.

Political risk

Relatively low, given that the retirement age is already going up, although any benefit would be so far in the future as to make it worthless as a short-term deficit reduction measure.

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