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Fresh thinking needed to tackle crisis

Allister Heath
THANKS to Britain’s spiralling budget deficit and out-of-control national debt, the link between taxation and spending has been broken, with large numbers of voters tricked into believing that ever increasing welfare benefits and public services can be made available to them at little or no extra cost. The truth, of course, is that the bill hasn’t magically gone away – it has merely been postponed until well after the general election.

So I read with interest the tax reform proposals unveiled last night by Reform, the think-tank. It is one of the few organisations in the UK with the guts to call for the scrapping of the vindictive and counterproductive 50p tax rate, as part of a broad package of reforms to slash the budget deficit over the next three years. Reform’s plans are much more radical than those proposed by the three main parties. It wants to cut the budget deficit from around 12 per cent of GDP in 2010-11 to 4.5 per cent by 2013-14, a drop of 7.5 percentage points of national income. There would then be further falls in subsequent years.

Reform’s proposal would see £1 raised from tax increases for every £7 saved from cutting spending, a much better ratio than the £1 to £4 being proposed by the Tories. This rule of thumb follows the Canadian example of the mid-1990s, one of the most interesting fiscal reforms of recent decades and the model which the next British government must follow. Canada’s budget deficit – which was running at 9.1 per cent of GDP – was cut to zero within three years and public debt – at 70 per cent of GDP – was cut by a third in five years.

There is a widely believed myth that, starting in the 1980s, the UK underwent a substantial switch from direct taxes (which are the most destructive of incentives) to indirect taxes (which target consumption and aren’t as damaging). There was indeed a shift from taxes on earnings towards taxes on consumption in the 1980s, but since 1997 the trend was reversed. Today, the tax mix is much the same as it was at the end of the 1970s, with income taxes accounting for the largest share – nearly a third – of total taxes. No wonder we’re struggling.

Under the Reform proposals, we would once again emphasise indirect tax, which makes sense: Vat would be extended while national insurance would be cut back by 0.5 per cent. All zero and reduced Vat rates would be scrapped, with all goods and services charged a flat 17.5 per cent rate. To compensate the poorest households for this change, Reform proposes increasing cash benefits by 7.5 per cent so that the poorest three decile groups would be better off. Additional revenue of £15bn would be raised.

I don’t agree with all the proposals contained in the report; it is too soft on inheritance tax and corporation tax, for instance. But it makes a valuable contribution to the debate – and is undoubtedly far superior to anything on offer from any of the three main parties.

OSBORNE’S WOES
Channel Four’s YouGov poll of key marginal seats makes sombre reading for the Tories. They are still on course to add a large number of seats – but not enough to form a majority government.

But one finding which sticks out is the answers to the question of who would make the best chancellor. George Osborne gets just 15 per cent, Alistair Darling a meagre 17 per cent and Vince Cable 27 per cent. Ouch.
allister.heath@cityam.com