Daily Mail

Curing our tax headache

- Hamish McRae

HOW much should it cost to run the government of a developed country? It is a simple question, but a tough one.

In the UK over the past 30 years, we have raised 34pc-36pc of GDP in taxation. Add in other government revenues and the total is 36pc-38pc.

Successive chancellor­s, notably Gordon Brown, have tried to push revenues up further, but all have failed.

A recession comes along and clobbers their neat projection­s on their head.

North Sea oil revenues boosted tax receipts in the 1980s, so you have to go back to the 1970s for a time when the Government took larger amounts in regular taxation.

In the late 1970s the top income tax rate hit 83pc and the top rate on savings income 98pc. People didn’t like that. We know what happened in 1979.

So it is a decent working assumption that the practical limit that is politicall­y and socially acceptable is around 37pc of GDP. That has not stopped chancellor­s spending more.

That is the background to the so- called green budget of the Institute for Fiscal Studies, which notes that under present plans taxes will be the highest as a proportion of GDP since 1986, and that the squeeze on public spending will continue well into the 2020s.

That sounds bleak until you consider two things. One is that the tax receipts will be only a percentage point or two above their 30-year levels, assuming, that is, that the money comes in. And the other is that this squeeze on spending still leaves it a couple of points higher than it was in the early Gordon Brown years.

True, we are an ageing society, and true, older people have greater health and care needs. But every developed country in the world faces similar pressures, and as the report this week from PwC observed, the UK could be the fastest-growing G7 economy through to 2050. That was thanks, in part, to our relatively young and growing workforce.

We do have a problem, but a more manageable one than most.

So can you run decent public services with government revenues of 37pc of GDP? Well, some countries do. Switzerlan­d does, spending about 32pc of GDP. Australia, the country with the largest number of British expats, does; it spends around 37pc of GDP.

The US spends about that too, though it has uneven public services – great in some places but not in others. But the best example of a modern state that has come through a huge fiscal crisis but has still managed to get spending down to around 37pc of GDP is nearer home. It is Ireland.

Backing BP

IT’S TIME to cut BP some slack. It is still walking wounded after the catastroph­e of Deepwater Horizon. That remains a text-book lesson for all energy enterprise­s as to why you can’t cut corners. Human lives matter.

But that was nearly seven years ago. Investors now quite reasonably baulk at the amount it pays its chief executive and directors. Profits were well below analysts’ forecasts and the dividend is not covered.

But there are two powerful reasons to support the company now.

First is that it is one of the handful of FTSE 100 companies whose dividend matters to millions of pensioners. Brian Gilvary, BP’s chief financial officer, says that the dividend is more secure now than it has been for two years, and that must be right. Second is that the company is on the march again, investing in new projects including in the Gulf of Mexico. It is worth rememberin­g that finding oil is something at which BP excels.

For now, we need the stuff, and we need it to be extracted in an ethical and responsibl­e way. A profitable BP is useful to society as well as its shareholde­rs.

Euro trouble

DO POLITICS matter to the economy? As far as the US is concerned, apparently not, because the bumpy ride of Donald Trump’s new administra­tion has been accompanie­d by rock-solid financial markets.

The dollar had a further spurt yesterday and the Dow was pushing to new highs.

As far as the UK is concerned, much the same applies, with the economy strong enough to put that little matter of an interest rate rise back on the agenda.

But Europe? Well, as Capital Economics notes, things might be rather different in France or Italy if Euroscepti­c parties are successful. Why the difference? Simple. In the case of the US and UK, there are independen­t currencies. In the case of European countries, there is the euro. Mario Draghi, president of the European Central Bank, told the European Parliament ‘the euro is irrevocabl­e’.

Of course, he has to say that, but the fact that he feels it necessary to do so is a signal that the rest of us should be ready to head for the hills.

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