The public sector says it needs to spend more cash each year to keep going. The private sector cannot or will not pay more tax to meet the bills. We have reached an impasse.
The original deficit reduction plan of the Coalition government rested on a very large increase in tax revenue. The June 2010 forecast said we would be paying £176.8 bn more in 2014-15 compared to 2009-10. That £2800 extra per person (on average), or more than £10,000 extra for a family of four, would take care of the increased costs of public services over the five years and cut the outstanding deficit.
Instead, as we will see tomorrow, with tax after tax revenue has fallen well short of the official estimates so far. Growth has disappointed, accounting for much of the loss. It is also clear that more people than expected have planned their affairs to avoid the higher rates brought in. Very rich people have gone offshore. People have declined to take profits on assets, or have sold assets at a loss to 0ffset. Housing transactions have been well down on pre crisis levels, avoiding Stamp Duty.
Many in the private sector say they cannot pay more. They feel the current tax level is quite high enough. They do not have any spare money to give the government. Critics of the private sector say they still have the money but are unreasonably witholding it. They want tougher attacks on avoidance. The problem is you cannot make people take a profit on an asset or buy a different home. They have every right not to do those things and pay less tax as a result. Successful highly paid financial sector personnel can say that they now want to work in low tax Hong Kong rather than higher tax London, and their employer may let them. You cannot make people drive their cars more -indeed the government wants us to drive less – so you should expect a shortfall in fuel duty.
We have a stand off. As a result the deficit remains dangerously high. The government needs to look again at spending as well as revenue, to get the deficit down.