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Tax Breaks Under Scrutiny as Cost to U.K. Hits $565 Billion

Tax Breaks Under Scrutiny as Cost to U.K. Hits $565 Billion

(Bloomberg) -- The cost of U.K. tax breaks is back under the spotlight.

Official figures published Thursday put the amount of foregone revenue at 430 billion pounds ($565 billion) in the current fiscal year, equivalent to half of total government spending. The cost has risen by 16 percent over the past five years.

The figures are likely to stoke pressure to close down ineffective tax breaks as an ageing population places increasing demands on the public finances.

Tax Breaks Under Scrutiny as Cost to U.K. Hits $565 Billion

Excluding breaks that are integral to the tax system, such as capital allowances and the tax-free personal allowance, the Resolution Foundation puts its estimate for foregone tax at 164 billion pounds -- a total that still exceeds the 146 billion pounds the government spent on health care last year.

The think tank identified reliefs on inheritances and a tax break for entrepreneurs as potential areas for reform. Together the two cost almost 20 billion pounds a year but benefit just over 300,000 people.

“Government spending rightly comes under a lot of scrutiny for cost-effectiveness but tax reliefs often escape even the most basic checks and debate,” said Adam Corlett, senior economic analyst at the Resolution Foundation. “Reviewing the value-for-money of these tax reliefs should be an integral part of the Spending Review process later this year.”

However, it is difficult to raise large amounts of money by targeting tax breaks, many of which are vital for encouraging investment.

The bulk of the cost stems from policies that command overwhelming public support. These include the personal allowance, which allows people to earn almost 12,000 pounds a year before they start paying income tax -- at a cost of the exchequer of 107 billion pounds.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, David Goodman, Kevin Costelloe

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