Budget's bottom line: taxes will rise and rise again
THERE are, apparently, magical sofas at Number Eleven Downing Street. The Office for Budget Responsibility (OBR) found £27bn down the back of one as recently as last November; but just four months later, it appears that the Chancellor managed to misplace £56bn behind another. The result, as the Institute for Fiscal Studies (IFS) points out, is a net loss of £29bn for George Osborne, and helps to explain the ultra-volatile, yo-yo-like properties of recent Budgets. The numbers have been all over the place, and seemingly good news has turned to bad very quickly, making it hard for investors, businesses and consumers to work out what is happening.
Such is the problem with relying so much on macroeconomic forecasting. The complexity of sophisticated economic systems is such that even the most talented of analysts cannot predict basic variables such as inflation, unemployment, wage growth or GDP even a few months ahead. So the idea that their forecasts, however mathematically rigorous and objective, should be trusted four or even five years ahead is laughable; the view that these should form the entire basis of our fiscal policy is terrifying.
Yet that, sadly, is exactly what Budgets have been based upon since Gordon Brown. Politicians, including of course Osborne, now imbue these intellectual exercises with excessive accuracy and construct entire, multi-year plans to meet very narrowly defined fiscal targets. It's all nonsense, and it doesn't work. It leads to ever more egregious examples of spreadsheet wars: imaginary cuts are made to imaginary spending levels and fantasy economies; then everybody gets very excited about another set of pretend changes when all the numbers are modified again every few months. Does anybody believe that the econo- my will grow at almost exactly the same rate every year until 2019? Of course not. Yet the OBR's numbers suggest that boom and bust has been abolished: it puts growth at 2.2pc in 2015, 2pc for 2016, 2.2pc in 2017, 2.1pc in 2018 and 2.1pc in 2019.
The only thing we can all be sure is that the final outcome will look very different. I'm not blaming the OBR - they are doing the best possible job. My beef is with the underlying philosophy. Perhaps the OBR should only predict three years ahead, or maybe it should publish fan charts and scenarios instead, so the Chancellor's tax and spend numbers would be subject to a low, medium and high growth stress test. Impossibly complex? Perhaps
But this doesn't mean that we should be nihilistic about the study of the public finances, however, or that the Chancellor's decisions should not be analysed robustly and in detail. There are some broad pattern predictions that we can safely make of the economy. It is plausible that productivity growth has slowed down, as the OBR believes. Several other basic facts are undeniable: the Chancellor is desperate to increase tax revenues faster than economic growth, and to grow spending at a faster rate than the economy. State spending as a share of GDP, on the Treasury's spuriously accurate measure, will fall from 40.8pc of GDP in 201415 to 37pc of GDP by 2019-20, a 3.8 percentage point drop. The total tax take is due to increase from 35.7pc of GDP to 37.5pc during the same period, a 1.8 point rise.
There is zero chance that such precise numbers ever materialise, but the broad intent is clear. It is also worrying, for two reasons.
First, the Chancellor is planning to hike taxes significantly. A large chunk of the extra GDP that he hopes the economy will produce next year will be gobbled up by HMRC. Yet Britain needs a lower tax burden, not a higher one; and the composition of the higher taxes is likely to be especially damaging of growth and incentives. Capital taxes are being hiked in net terms, with large tax raids on large businesses in particular.
The age-old principle that corporation tax should only be paid on profits, not losses, is being severely undermined: the ability to set off past losses actually makes sense within the (admittedly flawed logic) of corporation tax.
Debt interest is also being gradually stripped of its tax-deductible nature, which will make companies that require greater amounts of debt (such as capital-intensive utilities) more vulnerable to economic shocks.
None of this is clever: corporation tax is a poor system but reform should proceed in a thought through way. Instead, we are seeing the Chancellor launch smash and grab raids, without any coherent tax reform plan in mind. It's back to the kind of thinking prevalent during the reign of Louis XIV, the French Sun King: his finance minister, Jean-Baptiste Colbert, once infamously explained that "the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing".