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Fiscal Pain Relief? How More Accountability on Tax Reliefs Could Help Ease the Welfare Squeeze

07/07/2015 08:22 BST | Updated 06/07/2016 10:59 BST

As the Budget approaches we await the details of deep cuts in welfare spending, but the fact that they are coming is beyond doubt. With the main tax rises having been blocked off, and public services already facing a faster pace of cuts than in the last parliament, every sinew is being strained in the cause of deficit reduction.

Or is it? Largely absent from public debate to date is the more than £100billion that goes each year into tax reliefs - lower taxes for particular groups or activities. This is obviously a very big bill - almost what we spend on the NHS. Yet it only represents one subset of reliefs that the NAO categorises as "promoting economic and social objectives" (which often operates in a similar way to public spending). Tot up the full list of around 1,000 reliefs and the cost is dramatically higher. This narrower definition excludes all manner of tax breaks that walk and talk like a 'tax relief' - for instance, over £5billion of mortgage interest relief going to landlords, or the £5billion or so that businesses write off from their tax liability due to expenses on (broadly defined) training.

These costs are rising, not just in absolute terms but also as a percentage of GDP. Over the last Parliament they rose from 5.5% to 6% of GDP. To put this in perspective, the cost of all working age welfare fell from 5.7% to 5.2% of GDP over the same period. Tax reliefs (narrowly defined) cost us more than the entire system of non-pensioner welfare.

It's safe to assume that if these sorts of large and growing sums were being spent on working-age 'benefits' they would have been exposed to the now familiar cycle of review, cap and cut. Tax reliefs tend not to benefit the poorest (who, for instance, don't pay income tax): the benefits flow upwards. The easy pop-left conclusion to draw is that reliefs should be abolished and, hey presto, our fiscal woes would be greatly reduced at the same time as a powerful motor of inequality is turned off and our tax code simplified. Simple, but wrong.

Reliefs have an important role to play. In the absence of any tax relief for pensions, for instance, people would be exposed to unfair double taxation and the incentive to lock up savings for a lifetime would be greatly diminished, creating problems for both individuals and the exchequer.

That does not, however, mean that existing reliefs are all justified, efficient or well-designed. Anyone who has spent time in the Treasury won't struggle to think of a 'minor' relief that the Chancellor of the announced - often under pressure from a particular sector or lobby group - only to see its cost mushroom and its purpose be skewed. You will look in vain for any sense of strategy, or indeed accountability, for this £100billion. The Westminster mind-set oscillates between studied indifference to the rising tax expenditure bill, punctuated by the occasional opportunistic raid on pension-tax relief when a low-risk assault on the rich becomes a political imperative.

It's time to bring tax relief out of Whitehall's shadows and into our wider fiscal discussion. A bit of daylight would help: their costs should be audited and value for money-assessed. Even this baby-step would be controversial within Whitehall: don't underestimate quite how hissy the Treasury can get at the idea that this issue should be open to external scrutiny.

Transparency needs to be married to greater control. Where these tax expenditures mimic public spending, it might make sense to bring them inside the Spending Review process: those who think that tax reliefs should be protected while other services and benefits are cut, should have to fight their corner like everyone else.

If welfare spending rises more quickly than projected, it now triggers a parliamentary vote and a requirement to bring forward measures to check the rise (under the so-called 'welfare cap'). It's beyond me, therefore, why the rising of cost of tax-relief is met with a Westminster shrug. If there is to be a welfare cap, let it run in tandem with one for tax relief.

In case this all sounds a bit process-y, let's make it a bit more concrete. Say, as part of a balanced approach towards deficit reduction, the government committed itself to the very modest proposal of returning the cost of tax reliefs back to the level the Coalition inherited in 2010. Tricky no doubt, but hardly revolutionary stuff. This would yield around £10billion. As it happens, that's almost exactly the amount the Chancellor needs (given what's already been announced) to reach the government's target of £12billion of welfare cuts.

The lack of interest in this whole area reflects deeper currents in British fiscal politics. We have a right that increasingly self-defines by its ever tougher stance on a chunk of welfare spending that is already falling as a percentage of GDP; and a left whose primary instinct is always to focus narrowly, sometimes obsessively, on the progressivity of any proposed tax measure. The resulting void means that few are worrying about how to establish a broad-based and stable tax regime, better able to ride out economic ups and downs - despite this being one of the more glaring lessons of the post-crisis era. Our missing debate about tax relief is just one small element of this wider problem.

To govern, as the cliché goes, is to choose. Yet much of today's politics is about manoeuvring to narrow the perceived set of fiscal choices in order to create a faux sense of inevitability about the path selected. Yet alternative fiscal choices are always there to be made. We should bear that in mind on Wednesday lunchtime.

Gavin Kelly is the chief executive of the Resolution Foundation