Five Observations from the OBR’s New Costings Database

The OBR has just released a new dataset which collates the costings from every significant tax change since 1970 and spending changes from 2010. While little of this data is new, in the past it was hard to access, scattered across the documents from dozens of different Budgets, Pre-Budget Reports and Autumn Statements.

What can we learn from a quick glance over the data?

1. Bribing the electorate is going out of fashion.
2. Raising taxes after the election isn’t inevitable.
3. Over the last forty years, the tax system has shifted from a focus on income to consumption.
4. Political controversy doesn’t relate well to how much money a policy saves.
5. Only George Osborne’s first budget and the 2011 Autumn Statement have had any real impact on the deficit.

1) Bribing the electorate is going out of fashion. Economists used to worry that politicians would announce unfunded cut taxes just before an election. Using the OBR’s data, we put together a graph highlighting the tax changes introduced in the Budget immediately preceding an election.* Measured as a percentage of GDP, the trend seems to have been for ever fewer giveaways for the year of the election itself. A similar trend exists if you look at the tax changes for the year before the election. Politicians seem more likely today to rely on highly targeted, relatively cheap tax cuts spread throughout the parliament. 1p off beer duty, rather than 1p off income tax.

*we excluded the October 1974 election

2) Raising taxes after the election isn’t inevitable. By contrast, it is often believed that Governments use their first Budget after an election to get their unpopular decisions out of the way. We looked at the eleven Budgets that came after their respective election, and averaged the tax changes over the next two years. While eight out of the eleven did see some overall tax increase – think Gordon Brown’s National Insurance rise in 2002 or George Osborne’s 20% VAT in 2010 – this was far from uniform. The year after the 1987 election, for example, saw Nigel Lawson reduce the basic rate of tax by 2p to 25p and cut the higher rate to 40p.

3) Over the last forty years, the tax system has shifted from a focus on income to consumption. As part of the dataset, the OBR provides a fascinating table estimating how each fiscal event has changed the revenue taken in by each tax. If the tax code had remained frozen since 1969-70, the OBR’s numbers suggest that we would today be paying £38bn less in total in tax.  Equally interesting is the picture of how the tax system has changed. Compared to the 1970 tax code, we pay an awful lot less in income tax (£190 bn), but much more in taxes on consumption: £66bn for VAT (introduced in 1973), £36bn for fuel duty and £16bn on alcohol duty.

4) Political controversy doesn’t relate well to how much money a policy saves. By far, the biggest saver for the government has been the early decision to switch the indexing of benefits, tax credits and public sector pensions to CPI. By 2018-19, the OBR estimates that this will save £6.6bn in total a year.  By contrast, capping each household’s benefits to average take-home pay will save only £387m a year.

5) Only George Osborne’s first budget and the 2011 Autumn Statement have had any real impact on the deficit. In some ways, the Government’s fiscal strategy has remained remarkably stable. By far the most important measures to cut the deficit were announced in June 2010. The OBR’s judgment in the Autumn of 2011 that the structural deficit was larger than it initially thought led to the fiscal consolidation being extended an extra year. Apart from that every ‘fiscal event’ has been relatively insignificant for the long term fiscal picture.