The Coalition’s policy in the first two years in office was to expand current public spending. To pay for this and cut the deficit, they decided on private sector austerity, requiring large increases in tax payments. The extra tax revenue was to result from higher rates of tax (VAT, Income Tax, CGT, Stamp Duty, fuel duties etc), from economic growth, and from higher levels of compliance with tax law in a crack down on gross avoidance. As the public sector was still growing, the private sctor ended up shrinking to pay for the public sector.
They said they could bring this about whilst growing the private sector, thanks to an easy money policy agreed with the Bank and inherited from the outgoing Labour government. Unfortunately, the easy money policy has not generated the private sector led growth they sought. This is partly because the banks are still stressed and under regulatory pressures, and partly because the tax and inflation squeeze on the private sector has been too hard. Real incomes have continued to drop, as they did in the later Labour years.
The next budget should lift the squeeze on the private sector, to encourage the private sector led growth the economy needs. This in turn could increase the amount of tax revenue brought into the Exchequer at a time of high public spending.
The aim should be to set tax rates that maximise the revenue. 50% Income Tax cuts the revenue. 28% CGT cuts the revenue. Pushing too many into the 40% tax rate cuts consumption in the economy. Setting rates of 40% for Income and 20% for CGT would boost growth, transactions and activity and increase revenues from richer people. Taking more people out of the 40% tax band, as well as continuing to take people out of Income Tax altogether, would boost private sector purchases.
There is also a case for temporarily suspending Stamp Duty to get the residential property market moving more quickly. This would then promote more housebuilding, by helping make homes more affordable and removing some of the current blockages in the market.