Osborne’s U.K. Budget Revenue Forecasts Called Into Doubt by IFS

U.K. Chancellor of the Exchequer George Osborne
U.K. chancellor of the exchequer George Osborne holds the dispatch box containing the 2012 budget outside 11 Downing Street in London. Photographer: Simon Dawson/Bloomberg

U.K. Chancellor of the Exchequer George Osborne used revenue assumptions in his budget yesterday that may turn out to be overoptimistic, the Institute for Fiscal Studies said.

“One worry for the chancellor as the dust settles on his third budget is that in an attempt to achieve a fiscally neutral package he has created some risks,” IFS Director Paul Johnson told reporters in London today. “This budget may turn out to be less fiscally neutral than intended.”

The research group questioned whether Osborne’s decision to lower the top rate of income tax to 45 percent from 50 percent next year will only cost 100 million pounds ($158 million) a year, as the chancellor said yesterday. It said there are also concerns about whether caps on relief for higher-rate taxpayers will bring in 300 million pounds and an increase in stamp duty on purchases of the most expensive houses and apartments will produce 300 million pounds as Osborne expects.

Osborne pledged there would be no “unfunded giveaways” in his budget, citing threats of a downgrade of Britain’s AAA status from Fitch Ratings and Moody’s Investors Service as a reason to redouble efforts to stick to his austerity program, the most severe since at least World War II, and narrow a budget deficit that’s more than 8 percent of gross domestic product.

Liberal Democrats

A significant loss of revenue from top-rate taxpayers may also stoke unease among Liberal Democrats in Prime Minister David Cameron’s coalition. The party is demanding that the rich bear the biggest cost in repairing the deficit and agreed to lower the 50 percent rate in return for the stamp-duty changes and measures to help those on low incomes.

Osborne said yesterday the Treasury is losing almost as much in tax avoidance from the 50 percent rate as the levy is generating. He cited a study by the U.K. tax agency that showed the government would forgo 3 billion pounds next year from lowering it, while gaining 2.9 billion pounds from people who previously chose not to pay the tax now deciding they would.

“No chancellor can justify a tax rate that damages our economy and raises next to nothing -- it’s as simple as that,” Osborne told the House of Commons yesterday. “Thanks to the other new taxes on the rich I have announced today, we’ll be getting five times more money each and every year from the wealthiest.”

‘Taste for Avoiding’

The calculation “that cutting the top rate to 45 percent will only cost 100 million is particularly uncertain,” Johnson said. “Those who have got a taste for avoiding the 50p rate may continue to avoid the 45p rate.”

The IFS, an independent body that analyzes each budget the day after the chancellor delivers it to Parliament, said Osborne’s decision to tax pensioners more by freezing allowances is “a relatively modest tax increase on a group hitherto well sheltered from tax and benefit changes.”

The move drew criticism from many of Britain’s best-selling newspapers this morning. The Daily Mail said “Osborne Picks the Pockets of Pensioners” on its front page, while the Daily Telegraph said the “Granny Tax Hits 5 Million Pensioners.”

Osborne made a mistake in his presentation yesterday by dressing up “what was clearly a tax increase as merely a simplification” of the rules surrounding tax allowances, the IFS said.

Opposition Labour Party leader Ed Miliband repeated his criticism of Osborne’s measures today.

“The budget is giving a 40,000-pound tax cut to millionaires each and every year and it is funding that by hitting pensioners who have worked hard all their lives and played by the rules,” Miliband said in a statement. “This is an unfair budget from an out-of-touch government.”

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