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In his 'emergency budget' on June 22 George Osborne will set out his plans for making a huge reduction in the UK's structural budget deficit over the course of the next four years. This will involve fiscal measures totalling more than £75 billion. If he sticks to the Conservatives' pre-election plan, 80 per cent of the deficit reduction will be achieved through spending cuts and only 20 per cent through tax increases. Spending cuts on this scale - involving many departmental budgets being cut in real terms by more than 25 per cent over four years - will make it impossible to protect the poorest and most vulnerable members of our society.

ippr argues that, rather than starting from an arbitrary ratio of spending cuts to tax increases, the Chancellor should begin with a fair assessment of where the burden of deficit reduction should fall. A simple principle should dictate decisions - the rich pay more, the poor less. We also need to protect spending that will provide the foundation for future growth. This leads to a greater weight being given to tax increases.

However, an increase in VAT - widely anticipated - would be an unfair way of raising additional tax revenues. Taxing capital gains is better- but will not be enough in itself. The answer lies in increasing the basic and higher rates of income tax.

Any rise would simply take us back to 1997 levels, but a staged 3p increase in the basic and higher rates of income tax would raise £15 billion - around one-fifth of the amount needed to eliminate the structural deficit. More to the point, it would one of the fairest ways of tackling this issue.

Other alternatives the Chancellor could consider include a carbon tax and higher taxes on banks and other financial institutions.

Carey Oppenheim, ippr's Co-Director, said:

The emergency budget is a key early test for the coalition's progressive credentials. The Prime Minister has said 'we are all in this together' but that must mean the better off contributing more to deficit reduction than the poorest.
Yet the Canadian model of an 80:20 split makes it very difficult to protect the poor. . Public services will be cut dramatically and probably welfare payments too.
A fairer approach would be to include a bigger role for tax increases - and yet a rise in VAT, as some predict, will also hurt the poor the most.
There is a glaring omission from this debate because the politicians are too fearful of proposing it - that is income tax.
No one likes to see tax rises, but a staged increase of 3p on the basic and higher rates would only mean going back to the levels when the Conservatives last left office and Labour took over. The £15 billion raised would help to close the deficit and allow the government to protect services that are vital to the poorest and most vulnerable in our society.

Notes to editors

1. Deficit Reduction and the Role of Taxes, by ippr's senior economist Tony Dolphin, is available to download for free at www.ippr.org/publicationsandreports/publication.asp?id=758

Contact

Tim Finch, Director of Strategic Communications: 020 7470 6110 / t.finch@ippr.org