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Lib Dems are banking on taxation with a purpose

Faisal Islam
Economics editor
@faisalislamon Twitter

image copyrightPA Media

The Liberal Democrats are, on the face of it, planning the most austere attitude to borrowing of all the major parties.

Unlike both the Conservatives and the Labour Party, the Liberal Democrats have positioned their aim for the taxes raised annually over and above the day-to-day costs of public services to run a surplus of 1%.

But the message of their manifesto is that each tax rise has a purpose.

The most visible result of this is a potentially painful form of fiscal virtue for the Lib Dems. They are advocating an extra penny on all income tax rates - ie an extra 1p on the basic rate, the higher rate and the additional rate of income tax, raising nearly £8bn at the end of the Parliament.

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Their hope is that the electorate see this as an honest message to the public about the funding pressures for health and social care from an ageing society.

But it does leave them as the only UK-wide party advocating basic-rate income tax rises.

In addition, corporation tax back up to 20p and capital gains tax allowances being scrapped raises £15bn.

And then there is a huge £5bn rise in the Air Passenger Duty levy, which in fact will have to raise even more than that from the most frequent fliers, as the Lib Dems claim infrequent fliers will save money.

For reference, the entire APD system currently raises £3.7bn a year, the majority of receipts raised by economy flights, because 95% of the 110 million international flights are taken in this class.

Cannabis tax

Another eye-catching new tax - on the consumption, after legalisation, of cannabis - will raise £1.5bn a year, the Lib Dems claim.

The interesting thing about the manifesto is that many of the tax rises are specifically earmarked for spending commitments. This, known as hypothecation, is very much out of fashion at the Treasury, which prefers everything to go into a central pot, but helps sell tax hikes to the public.

But the manifesto says the proceeds of the Air Passenger Duty rise will go to the fight against climate change, while business taxes will pay for an increase in free childcare and the extension of free school meals.

The income tax rise goes to health and social care, and the "Remain bonus" - the fiscal boost predicted from a larger economy if Brexit is revoked - goes on 20,000 new teachers.

Finally, welfare reform and the cannabis savings will fund the police and youth services.

The problem is that if any of these sources of funding falls short individually, will they really de-fund the spending promises associated with it?

Do police get less if the country buys less cannabis? If the "Remain bonus" is not as bountiful as predicted, will there be fewer teachers?

Related Topics

  • UK taxes
  • Liberal Democrats
  • Companies

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