Time for an inquiry into tax system

Allister Heath
THERE are two conflicting trends right now in British economic policy: one is reassuring and invigorating; the other negative and deeply depressing. Both will help determine how successful and prosperous the UK will be over the next few years.

I am increasingly optimistic about the immediate, urgent crisis facing Britain – the desperate need to stem the budget deficit, which at more than £150bn a year is unsustainably high (and no, it doesn’t matter if the figure is slightly lower than predicted by Alistair Darling, it is still scandalously bad). The coalition government looks as if it is serious about tackling this and beginning to shrink the size of the state. We will know more after the emergency budget; we will really only be sure when cuts are actually pushed through in the face of what is bound to be intense opposition over the next two years.

Today’s forecasts from the Office of Budget Responsibility, the new independent group set up by George Osborne, will confirm that – despite much more downbeat growth predictions – the cyclical component of the budget deficit is shrinking. It will be interesting to see what the office has to say about the structural deficit, created by years of over-spending; and also whether it has calculated the real size of the national debt, including off balance sheet liabilities, unfunded public sector pensions, private finance initiative and other contracts, and all the other buried nasties. But regardless of the details, the government seems determined to tackle the deficit – and the recovery will be providing a helping hand.

It is much harder to be positive about the longer-term problem facing Britain: we are increasingly uncompetitive in the global fight for capital and talent. The looming hike in capital gains tax will be the latest in a long series of blows. The general public (not to be confused with readers of this newspaper) are not helping; a BPIX poll for the Mail on Sunday showed 76 per cent support for doubling capital gains tax (voters are ideologically confused: they also want pay cuts for the top 10 per cent of civil servants, as well as reductions in foreign aid). Labour, meanwhile, is moving further to the left, with leadership hopeful Andy Burnham calling for a Tobin tax on all financial transactions yesterday, a move which would do more to destroy London’s economy than virtually anything else one could imagine. His opponent Diane Abbott also supports such a tax. They don’t have a clue – but then neither do many other politicians on all sides of the House.

The drip-drip of firms moving operations, legal domiciles, capital or staff out of the UK has become as relentless as it is underplayed. It emerged this weekend that Zurich Financial Services, a key player in the City, is looking to create a single headquarters for its European life assurance business in Dublin. Britain’s ever-higher taxes are not a global phenomenon: Viktor Orban’s new government in Hungary wants to introduce a flat rate of income tax of just 16 per cent above a tax-free personal allowance.

We’ve had our fill of banking inquiries. Rather, we need a tax and competitiveness inquiry, commissioned by George Osborne, tasked with designing a tax system where work, thrift and investment are no longer penalised. Progress is being made on the deficit – but we also desperately need a supply-side, private sector revolution to fill the void left by our soon-to-be retreating government.