High and wide

The last thing we need is a set of ran­dom tax rises de­signed to raise rev­enue Roger Boo­tle

The Daily Telegraph - Business - - Front Page - ROGER BOO­TLE Roger Boo­tle is chair­man of Cap­i­tal Eco­nomics roger.boo­tle@cap­i­tale­co­nomics.com

Last week the Of­fice for Bud­get Re­spon­si­bil­ity gave a sober­ing ver­dict on the state of Bri­tain’s pub­lic fi­nances. Not that any reg­u­lar read­ers of this column should be in need of sober­ing up. The OBR said that, on a cen­tral view, by 2069/70, the ra­tio of gov­ern­ment debt to GDP would be 425pc. With an air of re­strained un­der­state­ment, it said that “it seems likely that there will be a need to raise tax rev­enues and/or re­duce spend­ing (as a share of na­tional in­come) to put the pub­lic fi­nances on a sus­tain­able path”.

The key to min­imis­ing fis­cal pain lies with en­sur­ing a strong eco­nomic re­cov­ery that will al­low us to live with the gov­ern­ment debt, while both low­er­ing the deficit and re­duc­ing the debt as a share of GDP over time. But even this will re­quire con­tin­ued spend­ing re­straint.

Ac­cord­ingly, in com­plete con­trast to the Gov­ern­ment’s current ten­dency to squirt money around as though there were no to­mor­row, it would be a good idea to save money where this can read­ily be done with­out in­cur­ring large eco­nomic costs.

Take the current triple lock on the state pen­sion, un­der which it is set to rise by either the rate of in­fla­tion, the rate of in­crease of av­er­age earn­ings or 2.5pc, which­ever is the higher. This means that it will go up next year by 2.5pc. With work­ers’ in­comes un­der ex­treme pres­sure, this is barmy.

Mean­while, the Cen­tre for Brexit Pol­icy (of which I am a fel­low) re­cently pub­lished a pa­per en­ti­tled “Re­plac­ing the With­drawal Agree­ment” which ar­gues that we should ne­go­ti­ate a re­duc­tion in our “di­vorce pay­ment” li­a­bil­i­ties to the EU and re­duce our financial ex­po­sure by with­draw­ing from the Euro­pean In­vest­ment Bank.

But at­ten­tion is also al­ready fo­cus­ing on where the Chan­cel­lor can plau­si­bly raise more tax rev­enue. This is po­ten­tially dan­ger­ous. It is no use rais­ing tax rev­enue in the short-term if this re­duces our growth po­ten­tial in the long-term. But rais­ing tax rev­enue with­out caus­ing eco­nomic dam­age is eas­ier said than done.

There has been much com­ment re­cently to the ef­fect that pen­sions relief is much too gen­er­ous and that it ben­e­fits the bet­ter off. In fact, much commentary on this is­sue is mis­guided. Giv­ing tax relief on pen­sion con­tri­bu­tions does not rep­re­sent a “bung” to well-off pen­sion savers. It is the straight­for­ward re­flec­tion of a sys­tem that makes pen­sion con­tri­bu­tions tax free, while mak­ing pen­sions them­selves fully tax­able.

Ad­mit­tedly, the current sys­tem is es­pe­cially favourable to pen­sion savers in two re­spects. First, the grant­ing of a 25pc tax free al­lowance means that this part of a pen­sion saver’s pot, on which they orig­i­nally ben­e­fited from tax relief, is not li­able to tax. Se­cond, the tax rate against which pen­sion savers gain tax relief when mak­ing con­tri­bu­tions is on av­er­age higher than the tax rate that they pay in re­tire­ment.

It would be pos­si­ble to ar­range mat­ters the other way around – that is to say, giv­ing no tax relief on pen­sion con­tri­bu­tions but equally mak­ing pen­sions not li­able to tax. (This would be sim­i­lar to the tax treat­ment of ISAs.) And it would be pos­si­ble to make other tweaks that raise the Ex­che­quer con­sid­er­able amounts of money.

An­other area of relief which costs the Ex­che­quer huge amounts is the abil­ity of com­pa­nies to off­set in­ter­est pay­ments against their tax li­a­bil­i­ties. This con­trasts with their in­abil­ity to off­set div­i­dend pay­ments. This acts as a strong in­cen­tive for com­pa­nies to fi­nance them­selves with debt as op­posed to equity. The Gov­ern­ment has al­ready moved to re­strict the abil­ity of com­pa­nies to off­set in­ter­est pay­ments against tax but it could go a good deal fur­ther, per­haps com­bined with a re­duc­tion in cor­po­ra­tion tax.

Sim­i­larly, there is both an ef­fi­ciency and fair­ness ar­gu­ment for equal­is­ing the rate of cap­i­tal gains tax with in­come tax. Yet, with the top in­come tax rate be­ing 45pc against the current CGT rate of 20pc, that would in­volve a huge rise in CGT for high earn­ers and would de­liver a blow to risk-tak­ing. Per­haps this should be an ob­jec­tive for the longer-term, com­bined with re­duc­tions in in­come tax rates.

If I had to point to one ma­jor op­por­tu­nity for the Gov­ern­ment to raise rev­enue while im­prov­ing ef­fi­ciency it would be the in­tro­duc­tion of a na­tion­wide sys­tem of road charg­ing. Tech­no­log­i­cal ad­vances now en­able the au­thor­i­ties the op­por­tu­nity to charge mo­torists for trav­el­ling on dif­fer­ent roads at dif­fer­ent times at dif­fer­ent prices – and in­deed some­times free – and there­fore to nudge their be­hav­iour to­wards what is eco­nom­i­cally de­sir­able. Gov­ern­ments could either con­tinue to re­ceive the an­nual rev­enue from such taxes or they could sell off the right to col­lect the rev­enue and thereby bank a sub­stan­tial cap­i­tal sum. In his com­ing Bud­get, the Chan­cel­lor will prob­a­bly pro­duce a new set of fis­cal rules, gov­ern­ing the de­sired rate of bor­row­ing and level of the debt to GDP ra­tio. Recent chan­cel­lors have tended to like such rules, so much so that they have fre­quently set new ones. In­deed, if Rishi Su­nak does come up with new fis­cal rules this au­tumn this will be the sixth set in 10 years.

Yet chan­cel­lors have never laid out a for­ward plan for the tax sys­tem that em­bod­ies both ba­sic prin­ci­ples and a road map trac­ing out how and when they in­tend to get from A to B. We par­tic­u­larly need this now. Given that it is surely pre­ma­ture to be seek­ing to re­duce the deficit rad­i­cally, there is time to get the Trea­sury think­ing se­ri­ously about the de­sired shape of the tax regime, build­ing on the Mir­rlees Re­view, pub­lished in 2010/11.

The last thing we need now is a set of ran­dom tax in­creases de­signed to raise rev­enue. More than ever, we need strong eco­nomic growth. And max­imis­ing growth re­quires a tax sys­tem that is struc­tured to strengthen in­cen­tives and boost ef­fi­ciency.

The Chan­cel­lor needs to en­cour­age strong eco­nomic growth by creat­ing a tax sys­tem that is struc­tured to strengthen in­cen­tives rather than take a DIY ap­proach

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