Huffing and puffing over public spending and tax cuts

Between 1992 and 1997 Labour spokesmen and women made all sorts of suggestions and proposals which would have increased public spending. Just before the election Gordon Brown as Shadow Chancellor announced that most of these were unaffordable or were not serious. He only permitted a short list of pledges to add to the fairly tight Conservative spending plans, and these were to be paid for by his new utility windfall and pensions taxes.

Today the Conservatives are doing the same. They are ensuring that all the items that go into their Manifesto as pledges are affordable. This means very little additional spending can go in, given the dreadful state of the national accounts. Labour’s dodgy dossier gets some things wrong, and costs others which were no more than aspirations in better times. Meanwhile the government’s own public spedning “promises” for future years are often just cloud cuckoo land proposals that cannot be afforded in the current climate. They are getting out the many large items they wished they had spent money on when they had the power, and putting them out there as a list for the next government to cut to get back to reality.

I was pleased to see the Conservative party is thinking again about how to find a lower cost way of recognising marriage in the tax system. The priority for tax cuts must be cuts in taxes on enterprise, cuts which will bring in more revenue. We need to increase the tax revenue from the rich, from the successful, from the company sector. The way to do that is to cut the higher rate of income tax, cut the corporation tax rate, cut the small business rate, abolish IR 35 and recreate the enterprise rate of CGT. Gordon Brown’s best policy was the 10% CGT rate for people investing in their own businesses. It is a pity he had to remove even this during his scorched earth phase.

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22 Comments

  1. Josh
    Posted January 5, 2010 at 8:15 am | Permalink

    It really is remarkable that the mainstream media (BBC, Sky etc) allow Captain Darling and Macavity to get away with claiming the Tories’ spending proposals mean a £34 billion black hole, when they are borrowing nearly £200 billion to cover a revenue gap

    • Posted January 5, 2010 at 12:11 pm | Permalink

      The irony of Darling moaning about so-called 'black holes' in funding is beyond parody, especially since he is the first Chancellor in modern history to authorise 'Mugabenomics' or printing money to fund spending (you know, that policy that suited the Weimar Republic so well).

      Un~********~believeable

  2. Mick Anderson
    Posted January 5, 2010 at 9:43 am | Permalink

    Presumably Labour are hoping that if they misrepresent Conservative plans, some of the mud will stick. They can't exactly crow about their success in running the country, so we can expect much more of this.

    Speeches about the NHS (from either side) are all academic if the economy can't afford the "promises". "It's the Economy, stupid"; although that assumes that the EU permits the UK PCC to make the changes it needs.

    There is a distinct lack of belief in any Government promises, but Mr Cameron has also lost trust with his revised position on the Lisbon Treaty.

    Four or five months of dubious statements and party political adverts are not going to enthuse the electorate.

  3. AndyC
    Posted January 5, 2010 at 9:48 am | Permalink

    Strikes me that Labour's dossier consists of going through things the next government might like to do, and saying 'ha ha, you can't do that, we've burnt all the money.' And they seem to think this is somehow a positive message. That said, the Conservatives need to be far less timid about the desirability of, not just the need for, spending reductions.

  4. alan jutson
    Posted January 5, 2010 at 9:53 am | Permalink

    John, your last paragraph sums up what is needed to help Business and Enterprise.

    We also need to encourage and reward the work ethic for those employees who are working (particularly those who are low paid) and those who are at present on Benefits, who do not want to work Due to the Benefit trap.

    The starting rate at which we all pay Tax (Income Tax and National Insurance) should be raised massively to at least £12,500 or half of the National wage.

    Then we need to sort out the over Complicated Benefits System, some of the excesses (over £200,000 housing benefit payments) which have been highlighted in the press during the past few weeks, just begger belief.

    Work or the willingness to work, must be encouraged.

    • Mark
      Posted January 5, 2010 at 12:59 pm | Permalink

      The idea that large (often immigrant) families should be housed in the expensive boroughs where they choose to register as homeless at enormous taxpayer expense ought to be easy to deal with, by giving the local authority the right to house them elsewhere.

      • alan jutson
        Posted January 5, 2010 at 4:27 pm | Permalink

        Mark
        Agreed, it should be simple, it is simple, there are many simple solutions.

        You have given one of what could be many.

        BUT if someone is getting over £200,000 in benefits, you have surley to ask yourself, are they likely to go to work, and as a consequence get it reduced.

        Result from all who have the power to do something, NOTHING HAPPENS, IT IS ALLOWED TO CONTINUE, and it will continue for many years to come, until someone has the commonsense to actually do something to change the system.

        As you can see from my various posts today, I am getting very frustrated with the State of our State control and its systems.

  5. waramess
    Posted January 5, 2010 at 9:56 am | Permalink

    Either rhe Conservatives fail to understand the severity of the revenue shortfall or they have decided to ignore it until after the election. Increases in spending in any area will be out of the question and cuts in government spending will be the only game in town worth playing if swinging tax increases are to be avoided.
    Cameron should stop playing games with the electorate and get real, it will suprise nobody and you can bet your life that the bulk of the electorate would prefer to see massive cuts in state services rather than increased taxes.
    ….and if we wish to popularise marriage in our society then do it by makng divorce settlements less penal not by reducing taxation.

    • Mark
      Posted January 5, 2010 at 1:12 pm | Permalink

      You're right that divorce legislation has undermined marriage through its economic penalties. The other major economic penalty source is the benefits system which distorts in favour of single motherhood. The tax system is an also-ran by comparison.

  6. Posted January 5, 2010 at 10:04 am | Permalink

    Yesterday David Cameron and George Osborne set out their plans for dealing with the killer deficit and the crushing burden of debt.
    And what did the BBC talk about on Newsnight and Today? "Was the marriage idea an incentive, an appraisal or a firm commitment?"
    Maddeningly, I missed the speeches because I had forgotten my earphones at the gym. But was there any attempt at unpicking the speeches and saying what they were about on the News?
    What do you think.
    With this level of reportage on the ever rolling news (which is becoming more and more like the pieces in my Private Eye Bumper Christmas Edition), we can look forward to a really stupid election for the next six months.
    And then, with lots of postal votes from Bob Dolecatcher and Bayonce Slagg (unmarried mother of fifteen), a RETURN OF NEW LABOUR!

  7. Brian Tomkinson
    Posted January 5, 2010 at 10:27 am | Permalink

    What we want to know, but what no party seems prepared to tell us, is how they are going to reduce the colossal public deficit and debt. If the performance of the past few days is a portent of things to come, this general election campaign will be a sham – a fraud against the British people. If politicians really want to try and restore trust they need to stop the spin and tell the truth – an alien concept to many of them. However, external voices are already about to make their impression on events. I read today that Pimco, the American investment group, has said that it will be a net seller of UK government bonds this year. Interestingly, the head of their European investment team is the brother of Ed Balls. If political leaders don't want to tell us what they will do, then they will be forced to by external forces but in the process will have made the situation even worse by their own self-serving prevarication.

  8. Posted January 5, 2010 at 11:03 am | Permalink

    What strikes me is that total govt receipts (mainly taxes and duties but also rental income) over the last twenty years was between 35% and 38% of GDP.

    Ergo, if you'd like taxes to be at the lower end of the range (and I would), then spending would also have to be kept to about 35% of GDP (a little bit of deficit spending doesn't hurt if economy is growing). Govt spending is currently nearly 50% of GDP and neither Labour nor the Tories (let alone the Lib Dems) have any credible plan for getting it down.

  9. Richard
    Posted January 5, 2010 at 11:40 am | Permalink

    I find it difficult to agree that the 10% CGT rate was a good policy. It was fantastic for the beneficiaries of course – wonderful for the private equity & hedge fund industries in particular. But why is it better to encourage entrepreneurs to sell businesses (and so pay 10% tax) rather than to hold them and earn salaries and dividends (and so pay 41% – to be increased to 51%)? There is no rationale for a lower rate of tax for capital gains as opposed to income tax, as Nigel Lawson recognised. The real conclusion is: 40% / 50% is far to high a rate of tax for entrepreneurs to pay on gains – therefore its far too high a rate of tax full stop.

  10. JimF
    Posted January 5, 2010 at 1:45 pm | Permalink

    This game is beginning to get annoying. Surely the way to play this for any opposition party is… we'd like to do A, B and C, but until we get into power we can't guarantee it as we don't know the state of the books. To have this muddle-mix of aspirations, guarantees and ideas is not a great idea. To me it just makes the Tories sound as muddled as Liebour and the other lot.

    Specifically, for David Cameron to make more "cast-iron" guarantees about the NHS or anything else before he is in power is just pointless… I can feel another Lisbon moment coming on!

  11. JimF
    Posted January 5, 2010 at 1:48 pm | Permalink

    BTW that covered your first 2 paras.
    Your third was spot on.

  12. Javelin
    Posted January 5, 2010 at 2:00 pm | Permalink

    The Conservatives have got it wrong on marriage. I don't think rewarding people for staying in a marriage is right. People only get divorced as a very last resort. Paying them a few quid a week extra is meaningless.

    Divorce costs a lot of money – not only to the families – but the increase in housing needed means more costs all round. Alot of single Mums get working tax credits if they work more than 16 hours a week.

    If the Conservatives want to REALLY promote marriage they need to stop bad marriages from happening in the first place. I've seen again and again research predicting the rate of marriage breakdowns. In most cases people fall in love, ignore each others bad points, get married, then after 7 years the marriage becomes stale and it falls apart.

    So what would I spend the money on. Well it flys in the face of love and all that but I would get couples who are getting married to face up to (1) what are the bad points about the other person (2) recognise if there are any early symptoms of a failing marriage (3) understand what is needed to keep love fresh in a marriage (4) understand that marriage is a legal contract that will cost a small fortune to get out of. (5) introduce pre-nuptule agreements.

    Marriage is declining in a straight line. Men simply do not want to get married because they have seen their fathers screwed over in the courts. Over half of all children are born out of wedlock. If the Conservatives are to turn the marriage situation around they need to address the real problems – and throwing a few quid at a marriage does not help in the slightest bit.

    • Posted January 5, 2010 at 3:02 pm | Permalink

      J, that's a good summary.

      I could also mention the cause/effect issue – are married people happier because they are married or are happy people more likely to get married/stay married?

      Finally, a transferable MCA is a nice idea (all other countries have it, just about, and let's not forget it was the Tories who scrapped it in the UK) but the real issue is the couple penalty in the benefit system. If mum is on benefits and dad is in work (cohabiting secretly) they stand to lose about £200 a week if they get married and/or admit that they cohabit.

  13. BillyB
    Posted January 5, 2010 at 2:30 pm | Permalink

    With all the national problems that need addressing, why are the Tories concentrating on twiddling with tax benefits for married couples?

    I can't imagine that being high on anyone's list of priorities. Get a grip !

  14. A.Sedgwick
    Posted January 5, 2010 at 2:32 pm | Permalink

    Further to my contribution yesterday the screw up(Fraser Nelson's opinion and mine) on marriage tax allowance transfer is another example of Cameron/Osborne's lack of heart. It is a no brainer, apparently only Turkey and Mexico do not recognise marriage for tax assessment. The response should have been ultra robust – we will let you know how we will pay for it when we know the election date. This tax transfer encourages mothers to stay at home, freeing jobs for others or enables them to work less hours and improves the wellbeing of families. Society breakdown is a hot topic, but money and mouth come to mind.

    The whole tax and benefit structure needs demolishing and rebuilding, but in the meantime let's start some logical tidying of the current bureaucratic mess.

  15. Javelin
    Posted January 5, 2010 at 6:07 pm | Permalink

    For those who don't know the figures most single mums who work more than 16 hours a week get working tax credits. Without thIs money they would go into hardship. They could then go to court, if they had children or spousal maintenance and get money off their ex partner.

    The only solution to the marriage crisis is to start treating marriage as a very serious act. Just as it was in the olden days, it meant for life. Today it doesn't, so how do you make it work.

    Marriage laws were written long before feminism. Women (generally the weaker partner) seem to have pulled off the trick of keeping the advantages but few disadvantages – they even get tax credits. (ie benefits).

    My first act would be to publish / explainthe marriage contract to both couples. This would kill marriage stone dead and we could then get on with a new marriage contract rather than letting it die a long death.

    I predict family lawyer will start to push for fairier marriage contracts once they realise there is not enough divorces any more to make a good living. This is not the way forward. Letting lawyers drive changes through case law will result in a system that suits them and not the children in marriages.

  16. Jonathan
    Posted January 6, 2010 at 6:43 am | Permalink

    It's a shame that my MP in neighbouring Reading East can't see the damage and how pointless IR35 is; he's still towing the party line that "it's being looked at". It's typical of a tax that stifles as the rules are unclear and it costs more to collect than the revenue stream itself.

  17. Tom
    Posted January 7, 2010 at 4:07 pm | Permalink

    “The way to do that is to cut the higher rate of income tax, cut the corporation tax rate, cut the small business rate, abolish IR 35 and recreate the enterprise rate of CGT.”

    Nice sentiments but the impression C&O give is that not a single one of these is remotely likely within a 2-3 year horizon.

    As an ‘undecided’ I’m afraid I won’t be voting Conservative unless I see some of these commited to.

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  2. […] while John Redwood has highlighted the need to cut tax on enterprise (I would add to that the working people who need to be incentivised to keep working, or to survive […]

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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