Public Finances and Tax Options

Key points

• Given current tax and spending plans, the debt-to-GDP ratio stands at about 98 per cent and will decrease slightly over the next five years while the deficit-to-GDP ratio will fall from currently 5 per cent to about 3 per cent, but the incoming government will either have to raise taxes or cut spending to meet the existing fiscal rules.
• Rather than pursuing arbitrary, medium-term fiscal targets, the next government should focus on long-term economic objectives when deciding their tax and spending plans.
• More public and business investment is needed to combat climate change, boost productivity, and return public services to an adequate level, which means a short-term rise in the deficit for long-term gain.
• High debt and deficit levels do not necessarily translate into worse economic outcomes; a credible plan that increases the deficit in the short run can improve the economy more than a non-credible plan that promises to decrease the deficit but reduces productivity and investor confidence.
• When consolidating public finances, the government should not increase corporation tax or decrease public investment as doing so would have long-term, negative consequences for the supply side of the economy.
• Instead, the focus should be on cutting government consumption spending and increasing income taxes if they want to improve the deficit.
• However, the government must be careful when deciding what is categorised as an investment – for example, human capital and other intangible assets should be included.
• Alternative policies, such as land value taxes and progressive consumption taxes, should be considered and introduced slowly; these policies can enhance welfare and productivity more than traditional ones do.

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