Bud­get's bot­tom line: taxes will rise and rise again

The Pak Banker - - OPINION - Al­lis­ter Heath

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".

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