General election 2017: Tax lock is bad policy, says IFS

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Theresa May on BBC's Andrew Marr show

Politicians should avoid any election pledges on a "tax lock" which would rule out rises across three major taxes - income tax, National Insurance and VAT - a think tank has said.

Theresa May said on Sunday a Conservative government would not raise VAT if it wins the general election.

But the prime minister declined to back a Tory pledge from 2015 that also ruled out rises in the other two taxes.

The Institute for Fiscal Studies said the 2015 move had been a "bad policy".

IFS analysts Helen Miller and Barra Roantree said: "This so-called 'tax lock' is a serious constraint because these three taxes contribute almost two-thirds of tax revenues.

"A government that wanted, or thought it might be necessary, to raise additional revenues in future would be foolish to tie their hands by ruling out increases in these workhorse taxes."

Mrs May said she would not be making "specific proposals" on taxes unless she was "absolutely sure" they could be delivered.

She later said the Conservatives "won't be increasing VAT".

Labour, which has also ruled out a VAT rise, said it would deliver "low taxes for low and medium earners" if it won the general election on 8 June.

Image source, Conservative Party
Image caption,
Tory tax pledge published by ex-PM David Cameron in 2015

Chancellor Philip Hammond's recent U-turn on a planned increase in taxes for the self-employed "highlights the problems with the tax lock", the IFS said.

Mr Hammond was forced to drop the plans after criticism that he was breaking the spirit of the Tories' 2015 election pledge.

Tax squeeze

Whoever wins the election needs room to manoeuvre because the government's reliance on tax income is set to reach its highest since the early 1980s, the IFS said.

It forecasts that by 2019-20 tax receipts will be at the highest share of national income, at 34.4%, since 1981-82.

Where will the tax take come from in 2017-18?

  • Total tax receipts in 2017-18 are forecast to be £690bn
  • Income tax, National Insurance contributions and VAT are forecast to contribute almost two-thirds (62%) of tax receipts in 2017-18
  • Property taxes will provide 9% of receipts in 2017-18, corporation taxes 8%, other indirect taxes 8%, capital taxes 5%, fuel duties 4%, and other taxes 4%
  • Other indirect taxes include alcohol duties, tobacco duties, betting and gaming duties, air passenger duty, insurance premium tax, landfill tax, climate change levy, vehicle excise duties and soft drinks levy
  • Other taxes include devolved taxes and environmental levies

Source: IFS

"The next government, whatever its colour, will face pressure to maintain this increase in tax revenues, and possibly to raise further revenues," said Ms Miller and Mr Roantree.

After the last five elections, chancellors have routinely increased taxes in the 12 months that followed, they said.

The government raised an extra £3.5bn in tax after the 2015 election, while after the previous four elections ministers raised an extra £7.5bn on average, the think tank said.