It’s no secret that even the Conservatives were surprised to get an outright majority in the recent election.
But the surprise victory has brought with it a surprise problem — how does the new Government pay for everything it promised?
During the campaign David Cameron made a raft of promises on both spending and safeguarding of funding that now mean the Government has a theoretical shortfall in its budget.
Cameron promised to safeguard around half of current government spending, while also committing to expensive policies like an extra £8 billion in funding for the NHS by 2020, the revival of Right to Buy and freezing commuter rail fares for 5 years.
At the same time his party has promised not to increase taxes that contribute around 60% of the Treasury tax revenue.
Morgan Stanley’s Jacob Nell and his team estimate in a note published today that the total spending and tax commitments will add the equivalent of 1% of GDP to the deficit. Given the Conservatives’ commitment to balancing the books, this will be a worrying prospect for the party.
So where will all this extra money come from? Morgan Stanley believe one likely source could be higher council taxes for expensive properties.
The Conservatives rubbished similar proposals from Labour and the Liberal Democrats during the election campaign but the bank doesn’t think this will be much of an issue.
Here’s Morgan Stanley: “Although the proposal to increase the level of taxation on higher value residential property — either as a separate mansion tax (Labour) or as additional bands of council tax (Libdems) — was a proposal from the parties which lost the election, we note that the Chancellor has a track record of adopting the opposition’s policy proposals.”
Morgan Stanley thinks the Government could order both a revaluation of properties and a shake-up to charges.
Council taxes are charged based on a band system defined by their value. But estimates of property values haven’t been adjusted since the tax was introduced in 1992. A reassessment could raise tax receipts “significantly”, say Morgan Stanley, as some properties have shot up in value and could be bumped up to higher tax bands.
Morgan Stanley also think the tax bands themselves needs re-thinking, saying: “The level of council tax for the most expensive mansion in an area is typically only three times that of the smallest dwelling, while the maximum charge is only around £3,500 a year in the most expensive council tax area, with the maximum charge from many councils is significantly below this.”
If the Tories do follow Morgan Stanley’s predictions and raise council taxes on higher value properties, they will have instituted a back-door mansion tax of the type they attacked Labour for.