FactCheck: a £4bn tax cut?
Updated on 14 August 2008
The government says it's cutting taxes by £4bn this year. FactCheck investigates.
"Oil prices are coming down they year but it's still tough for people. That's why we are cutting taxes by £4bn this year."
Yvette Cooper, Chief Secretary to the Treasury, Channel 4 News, 12 August 2008
The background
How times change. For much of its time in office, tax cuts were something Labour accused the Tories of plotting at the expense of public services.
But now the government - which sets great store on stability - has announced it is cutting taxes to tune of £4bn this year.
When questioned about rising inflation earlier this week on both Channel 4 News and Radio 4's The World at One, the Treasury number two said the government was taking tax-cut action to ease the rising pressure on the nation's wallets.
But is the £4bn figure right? Where do these tax cuts come from, and who will they benefit?
The analysis
The Treasury told FactCheck the £4bn was made up of already-announced tax measures.
Planned measures that took effect this financial year, primarily the decrease in the basic rate of income tax from 22p to 20p in the pound, gave around three quarters of a billion pounds' worth of cuts. But the bulk of the cash comes from a pair of newer cuts.
The heftiest is the £2.7bn increase in personal allowances announced in May. This one-off measure gives a £120 boost to all basic-rate taxpayers, and replaces the cash lost by most - though not all - of those hit by the scrapping of the 10p starting rate of income tax in April.
Another £1bn or so comes from the postponement of a 2p increase in fuel duty.
Amid high oil and petrol prices, the planned increase was postponed in the budget (March 2008) until October, at a cost of £550m. Last month, the chancellor announced the measure would be postponed again.
Hang on a second - is a postponed increase really the same as a cut?
It depends on how we choose to measure things. "The government sets out what it wants tax and benefits to look like but as it's a difficult time, it changes that," said Stuart Adam, a senior research economist at respected independent think tank the Institute for Fiscal Studies.
It's not quite new money back in our pockets as with the £2.7bn tax package, but the pair of changes add up to a £3.8bn cut in the tax the government had told us we'd be paying this year.
This doesn't necessarily mean that the tax burden for the year is £4bn lower than last year, or that measures announced this year or, even those which are due to take effect this year, add up to a £4bn decrease. If you ask the tax-cut question in relation to a different set of factors, you could come up with a different answer.
But Adam reckons it's "not unreasonable" to tally up this £4bn-worth of cuts in the context of what he government is doing to help people deal with rising prices.
But there's a sting, of course, and that's that these tax cuts aren't set to stick around.
"Another way of saying what she's saying is that there are £4bn giveaways that are due to disappear next year," says Adam.
The government may decide to keep the measures in place, although of course, this would cost money which is so far not budgeted for.
The verdict
The £4bn figure has slippery edges; exactly what period it refers to, or on what basis, hasn't been set out.
But it is fair to say that the government has announced a high-profile £2.7bn tax-cut package, plus a postponement of a fuel duty increase.
As the chief secretary says, these are tax-cutting measures for this year - and so far, they're set to disappear back into the tax hole next year.
FactCheck rating: 2
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The sources
12 Aug 2008: Channel 4 News - surging food and energy prices create record inflation rate
Budget 2008
Institute for Fiscal Studies
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