Tuesday 1 October 2019 5:49 am

The chancellor should deliver tax cuts, not more spending

Mark Littlewood is director-general of the Institute of Economic Affairs.
and John O’Connell
John O’Connell is chief executive of the TaxPayers’ Alliance

Sajid Javid used his major conference speech yesterday to announce a raft of new spending pledges. The chancellor’s focus was infrastructure and rural areas, with money promised for bus networks, roads, and the rollout of 5G. 

This sits alongside the strapline of this year’s Conservative party conference itself, which focuses on spending more on the NHS, police, and schools.

There is little doubt that these policies will have been polled and tested in focus groups – and after almost a decade of rhetoric concerning “austerity”, they will be popular. But they are also spending-heavy. 

So have the key conservative principles of sound public finances and low taxes been junked?

This afternoon, at the Conservative party conference, City A.M. editor Christian May will be sitting down for an “in conversation” event with Javid, and will be pushing him on this very issue. The event is hosted by the TaxPayers’ Alliance (TPA) and the Institute of Economic Affairs (IEA) – two organisations that we are proud to lead and which have a long and strong history of delivering high-quality research on the benefits of a low tax, free-market economy.

The tax system needs serious reform. At more than 22,000 pages, or 12 times the size of the King James Bible, the UK tax code is hideously complicated, burdensome, and lacks the trust of the tax-paying public. 

Politicians like to talk about fixing this when they are in opposition or pitching for a senior job, but when faced with a mountain of other competing priorities and a public mood that responds well to spending pledges, it is no wonder that tax simplification – nevermind tax cutting – can fall by the wayside. 

As a result, the tax code is growing unsustainably – it is more than double the size it was in 2009.

But that doesn’t mean they should not try, for the prize for tackling this bloated tax system is immense. 

In 2012, the TPA convened the 2020 Tax Commission with the task of proposing a major overhaul of the system. The final report, The Single Income Tax, recommends abolishing taxes on capital and labour income disguised as business taxes, and replacing them with a tax on distributed income. 

Income tax and Employees’ and Employers’ National Insurance would be merged into a single tax on labour income, with rates levelled down so that certain groups don’t face higher bills.

The chancellor’s forthcoming “infrastructure boom” represents the fastest increase in day-to-day spending of any British government in 15 years, something he was keen to highlight when he delivered last month’s spending review. But wouldn’t large-scale tax reform leave the public purse short? 

We think not. Tax cuts can drive economic activity in ways that can ultimately be good for both growth and tax receipts. Unfortunately, the Treasury continues to rely on static models that show a fall in revenue for any given tax cut. Not enough effort is made to dynamically model the economic impact of tax changes.

As the IEA pointed out in our response to the spending review, turning on the spending taps means the government “risks glossing over the fact that the tax burden is at its highest for almost 50 years. If the public finances are in a much improved state, tax cuts should be at least as high a priority as any spending increases”. 

You can be sure that Christian will be pushing these issues, and more, with the chancellor today, and we look forward to hearing what he has to say.

Free market organisations like ours have a decades-long history of arguing for lower taxes, a smaller and more efficient state, and freedom for all. 

The Conservative party conference has given us some cause for optimism, but we will be looking to senior politicians – especially the chancellor – to deliver the tax cuts that we know businesses and individuals desperately need to boost productivity and investment across the country.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.