Higher rates, less revenue – the agony of UK finances

 

In the peak year under Labour an 18% Capital Gains Tax rate brought in £7.8 billion of revenue. Last year a 28% rate brought in just £3.9 billion, a fall of 50%.

In the peak year under Labour with  a 40% highest rate, Income Tax brought in £22.5bn from self assessment Income Tax. Last year with a 45% rate it brought in £20.85billion, a fall of 7.3%.

In the peak year under Labour the then lower Stamp duty rates on property brought in £9.9billion. Last year with higher rates the Treasury collected £9.4 billion, a fall of 5%.

The one tax increase which did work, bringing in substantial new revenue, was the VAT increase. Labour’s peak year for VAT brought in £89.9 billion. Last year the higher rate brought in £118 billion, an increase of 31%.

The tax cut that worked, taking more people out of Income Tax altogether with higher thresholds for standard rate payers, still allowed an increase in revenue from PAYE from Labour’s peak £126.4 billion to last years £135.5 billion.

Meanwhile, total public spending has risen from £655.6 billion in 2009-10 to £711.5 billion last year, a rise of 8.5% in cash terms. There are arguments about whether this is a small reduction or a small increase in real terms. Bearing in mind the  planned freeze on public sector wages, which are a main component of public spending, the inflation rate in the public sector has clearly been reduced substantially.

The latest figures for total spending and borrowing remind us there is still a lot to do in the next Parliament to eliminate the deficit. This remains a necessary task.

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51 Comments

  1. mickc
    Posted September 3, 2014 at 5:35 am | Permalink

    Osborne’s strategy has been a failure.

    He should have have slashed spending and slashed taxes. Instead, we have had BOTH high spending and high taxes. The result has been economic stagnation.

    The “recovery” has been a mirage with house prices again being pumped up, but no lending to SMEs. The unwise Western attempt to subvert Ukraine has inevitably been countered by Russia, and the resulting sanctions imposed by the West has damaged the economies of the EU-which was doing a fine job of doing so itself in any event.

    Regrettably this Conservative led coalition has been catastrophic. Salesmanship can only go so far-eventually the customer wants a product which works, BMW rather than BMC (for those who can remember a British owned and run UK car industry).

    • Lifelogic
      Posted September 3, 2014 at 5:53 pm | Permalink

      Indeed Osborne has been lucky that lots of rich NonDoms have boosted Londons property and construciton, due to world troubles and Euro troubles. He does not deserve credit and how is his IHT promise coming on. Will we get it on May 8th 2015? If the Tories are actually elected with a majority (about 10% chance it seems).

      His over high rates, huge waste and GAAR are a disaster.

    • Mark B
      Posted September 4, 2014 at 3:37 am | Permalink

      mickc

      I would ordinarily agree with you but ! Labour were not idle whist in office. They made dam well sure that the size of the State was going to grow as big as possible, with as many people getting something in the form of a hand out. For any government to go in there and start slashing would be a disaster and, the Conservative party needed to change its image as the ‘nasty party.’ Not making excuses, just offering an alternative view.

      Better to let the balloon down slowly rather than take a pin to it. Trouble is, they did not let the pin down slowly, and did not tackle the largess of Local Government. BIG mistake !!

  2. Lifelogic
    Posted September 3, 2014 at 5:40 am | Permalink

    Does the public sector spending include the increase in liabilities incurred from all the unfunded state sector pensions?

    Indeed the UK government always struggle to raise more than about 40% of GDP in tax (even with Labour & Healey’s idiotic 98% income tax rates). So if they continue largely wasting money at the rate they do, they will always have a large deficit. As you point out many tax rates are higher than the maximum tax revenue point which is hugely damaging and counter productive. They should actually be far below this rate, aiming to raise perhaps 20% of GDP (of what would be a much higher GDP anyway). GAAR and the HMRC raiding banks without court approval are dreadful and damaging developments too. GAAR (General anti-avoidance rule) inflicts huge damage on investments as no one can know what their tax liablities will actually be so they often do not make them.

    Even more worrying is the often dreadful level of ‘public services’ delivered for this money.

    • Lifelogic
      Posted September 3, 2014 at 6:02 am | Permalink

      On poor public services we see it in Rotherham. It was reported on BBC radio 4 that:
      “The police and council disbelieved the victims” and “the girls we not just let down by police they were let down by society”

      Personally I do not see it like this at all. The police and councils surely were just looking for reasons not to act, as is so often the case, unless it motorist mugging or similar cash generative activities. I am quite sure many of those in contact with the girls knew exactly what was going on. “The girls were let down not just by the police but by society”, what weasel word they use to deflect blame.

      It was the many state sector workers and police who were the only ones who could legally take any action, they were told about the problems endlessly, but chose to do nothing. What on earth has “society” got to do with it? It not just in Rochdale either.

      • margaret brandreth-j
        Posted September 3, 2014 at 11:26 am | Permalink

        They would have probably been suspended by private sector workers trying to get a handle on the circumstances if they had even shown a tad of interest for the girls. Don’t split int public and private , they work together.

        • Lifelogic
          Posted September 3, 2014 at 5:56 pm | Permalink

          Nonsense one parasites on the other by and large. The private sector is paid 50% more for doing far less of any use.

          I accept this is not always the fault of the coal face workers in the state sector, many are indeed excellent. But overall the state sector machine is pretty dreadful.

          • margaret brandreth-j
            Posted September 4, 2014 at 2:16 pm | Permalink

            Nonsense! I work in both and have ongoing comparisons.

  3. Mark B
    Posted September 3, 2014 at 6:17 am | Permalink

    Why do you need so much of OUR money ?

    • Posted September 3, 2014 at 10:35 am | Permalink

      Well that’s a good question! But you have to recognise that all money in your possession originated from government spending initially. That is all the money you need to pay your taxes, pay for your grocerices etc came from them – even if indirectly. If it didn’t it must be counterfeit!

      So a better question is why they want it back in such a hurry. The lower the level of taxes the longer it stays in the economy to help us run our businesses. They still get it back, unless we save it or spend it on too many imports, but it just takes a little longer when taxes are lower.

      • libertarian
        Posted September 3, 2014 at 1:03 pm | Permalink

        petermartin2001

        Er thats a complete failure to understand how money works. Yes the government have notes printed, thats it. Now days money exists that ISN’T printed or distributed by the government . To state that all money arose initially from government spending is just plain wrong and never has been true. Money is a token of exchange and the promissory notes are backed by the government via the Bank of England that is all.

        • Denis Cooper
          Posted September 3, 2014 at 1:21 pm | Permalink

          Good luck with this discussion, I shall watch from the sidelines.

          • Mark B
            Posted September 4, 2014 at 3:40 am | Permalink

            He, he !

            :)

        • Posted September 3, 2014 at 4:15 pm | Permalink

          Is it plain wrong? Let’s think about it. Suppose a country were to establish a completely new currency – and that’s pretty much what happened in Germany after WW2.

          There would be none of the new currency in the economy. So how would Government introduce it? They’d probably give everyone a few samples, but basically they would just spend it in. At the same time they would levy taxes, with a demand they’d be paid in that new currency. In this way the currency becomes desirable, and valuable, to hold as everyone would need to acquire it to pay their taxes. There’d be no need for any involvement of any precious metal.

          So, logically the spending has to come first and taxation follows later to regulate the spending power of the population and prevent inflation.

          But governments should not necessarily expect to get back all the currency they issue. If their populations wish to save some of it, then of course that won’t happen, unless they issue bonds and effectively ‘borrow’ it back.

    • Lifelogic
      Posted September 3, 2014 at 1:05 pm | Permalink

      To pay bloated salaries and pensions to countless EU and UK bureaucrats, augment the feckless, subsidise wind farms & PV & electric cars, make energy more expensive, fight pointless wars, lent to the PIGIS to support the EURO, overseas aid, £200K for HoC clerks (plus home and pension I think), run the basket case NHS, give loans to EU student that are unlikely to be repaid, HS2 ……..

      • Mark B
        Posted September 4, 2014 at 3:45 am | Permalink

        Unless I missed it, you forgot to add; “Green Crap !”

    • Leslie Singleton
      Posted September 3, 2014 at 1:48 pm | Permalink

      Mark–What they “need” has little to do with it–What it is all about is redistribution–Without here commenting on whether it is right or wrong, this effectively takes from the rich and gives to the poor.

    • acorn
      Posted September 3, 2014 at 4:47 pm | Permalink

      To stop you spending it Mark, that’s all. Taxes are used to regulate demand in the economy to control inflation. The politics of spite and envy decide who will pay the required amount of tax. Taxes don’t physically pay for anything. The government always has to spend before it can tax, else there would not be any money in the ecomy to pay the tax with. Without the tax there would be far too much money in the economy chasing the goods and services available to buy, hence, inflation.

      • Posted September 3, 2014 at 8:59 pm | Permalink

        Acorn,

        You’re right, of course, that “taxes are used to regulate demand in the economy to control inflation” and that they don’t pay for anything, except at local level.

        But I wouldn’t quite agree that it’s all about ‘spite and envy’. Firstly, there are valid social reasons for not wishing the level of inequality in society to exceed certain bounds. Secondly, and more practically, if a taxpayer doesn’t have much money there’s no way they can create inflation so there is no need for them to pay much tax.

  4. Mike Stallard
    Posted September 3, 2014 at 6:44 am | Permalink

    It seems to me – an outsider – that there is a very strong need for some kind of tax simplification.
    It seems to me that we have got to start cutting back hard to stop borrowing and printing money.

    • alan jutson,
      Posted September 3, 2014 at 2:20 pm | Permalink

      Mike

      Your comment.

      So simple, so right.

      Perhaps too simple to understand for those with an expensive education.

    • Posted September 3, 2014 at 9:15 pm | Permalink

      Alan and Mike,

      I don’t think anyone needs an expensive education to know that all money, except loose change, these days, is either printed or created in a computer digitally. Its been a long time since there’s been any gold or silver involved.

      All money is a credit on the part of those who hold it. Again, its easy enough to understand that for every credit there has to be a debit. That debit has to be held be the currency issuer. An issuer has to be in debt otherwise they haven’t issued anything. Of course if an issuer over-issues then there can be an inflation problem. On the other hand they can under-issue too!

  5. Bazman
    Posted September 3, 2014 at 6:57 am | Permalink

    It can be read from this that the economy faltered not helped by tax increases especially VAT which is a regressive tax that hits the poorest hardest and also have the least wriggle room as they still have to spend to live and contribute the most to the economy. Don’t forget it was the Tories who put up this tax and further increased taxes for the average person such as myself by reducing the threshold for tax credits costing many such as myself £80-100 a month. £80-100 a month that will not be spent in the economy and local businesses in general, stashed in banks in this country, not put in tax havens or wasted by government. Take your pick deluded right whinners.

    • libertarian
      Posted September 3, 2014 at 1:05 pm | Permalink

      Bazman

      Blimey you’re finally starting to see the light !!!! You are right the mildly socialist coalition government has hit us all hard with inappropriate taxes. Glad to see that you recognise that earnings spent in the real world economy are more valuable rather than being spent on government

      • Bazman
        Posted September 4, 2014 at 3:05 pm | Permalink

        Or given as tax cuts to the rich which is not real world either.

        • Edward2
          Posted September 4, 2014 at 8:35 pm | Permalink

          Only cuts in the sense the percentage rate was cut Baz.
          The rich are paying more now.
          So not a cut really is it?

  6. Antisthenes
    Posted September 3, 2014 at 7:00 am | Permalink

    Lefties believe in the climate change hockey stick graph which has proven to be more fallacy than truth but do not believe in the Laffer curve which is proving to be consistently accurate. Which only proves once again that whatever the left believe in it can be certain that the opposite is true. Yet we allow these people to govern us and probably will do again soon and no doubt a graph could be constructed that would show how negative are the effects of doing so.

    • Lifelogic
      Posted September 3, 2014 at 1:09 pm | Permalink

      Lefties work on the politics of envy, irrational base emotion, the magic money tree and the equality & it is not fair religion. Logic is not their strong point.

      Inequality is good and essential, it make people get out of bed and do some work.

      • Posted September 3, 2014 at 9:28 pm | Permalink

        Yes, of course, some inequality is essential. It is right and proper that those who work the hardest should be rewarded for that. But, can it reasonably be said that some work thousands of times harder than others?
        In other words, the question is how much inequality should we have? There’s no right answer to that question. Hardly anyone is saying there should be none. But a lot are saying there should be less than there is.

  7. Richard1
    Posted September 3, 2014 at 7:07 am | Permalink

    Its time for leftists to admit that the Laffer Curve is absolutely apparent as these examples and many others show: at least at anything like the tax rates we have in the UK and Europe if you lower the rates the revenues go up and if you raise the rates the revenues go down. The Left should explain that they think high tax rates are desirable even if they raise less revenue than low tax rates, perhaps because they think it creates ‘equality’ or some other sort if ‘fairness’. Then let’s have an election on the issue.

    • Posted September 3, 2014 at 9:50 pm | Permalink

      As possibly one of those lefties I do have to admit that Laffer was right to some extent. Obviously, say, if we do not tax cigarettes we don’t get any revenue at all. On the other hand if we tax them very highly we don’t get as much revenue as if we tax them optimally. Either smokers give up, which could be the object of the exercise, or they buy smuggled cigarattes, which wouldn’t be the object!

      On the bigger picture I would just suggest that capital gains tax is down becuase the state of the economy is not allowing anyone to make those capital gains rather than anything to do with a Laffer effect. But, we need to consider if it is not just one tax but all taxes which can be optimised. That is quite a different thing. If more tax is taken out of the economy in , say, income tax then there is less left for other taxes like VAT or capital gains.

      We need to look at it from a different angle. There are only two ways that money, which has been issued originally by government, can be kept out of the hands of the taxman, no matter how non-optimally those taxes might be set. If he doesn’t get his cut on one transaction, he’ll get it on the next. So it’s easy enough to see that he’ll always get whatever money is being used in the economy provied it is moving. When it is stopped, as it is when it is being saved, either by individuals and companies, or by Central banks of the big exporters, then he can’t get his money no matter how optimally those taxes are set.

      That is the real reason governments have a deficit.

      Reply UK shares and property are now higher than in 2007 so people have made capital gains

  8. Ian wragg
    Posted September 3, 2014 at 7:22 am | Permalink

    Simples John. You keep flooding the country with foreigners and depressing wages so the tax reduces. That’s why the recovery is an illusion. Despite the rhetoric things are bad and likely to get worse
    The property boom is about to burst and that will reduce revenues further. You’ve been caught out with only 37 weeks to go.
    5 years wasted.

    • Mondeo Man
      Posted September 3, 2014 at 8:37 am | Permalink

      Ian – and this property market burst will likely be the last. A crowded market does not make a rich one – ask any of the denizens of Calcutta.

    • alan jutson,
      Posted September 3, 2014 at 2:22 pm | Permalink

      Ian

      Its double whammy, because those on low salaries/wages also claim working tax credits.

      The lower the wages go the more people qualify for working tax credit !

  9. Brian Tomkinson
    Posted September 3, 2014 at 7:58 am | Permalink

    JR: “The latest figures for total spending and borrowing remind us there is still a lot to do in the next Parliament to eliminate the deficit. This remains a necessary task.”
    That’s some understatement from a supporter of a party which pledged to eliminate the deficit by 2015. I know its not your fault, its all down to those pesky LibDems, you know the ones with whom your leader could not wait to go into coalition. I know also that through twisted logic you can satisfy yourself that your wonderful party hasn’t broken any promises because you didn’t win the last election. At the same time, according to you, UKIP has broken its promise to take the UK out of the EU precisely because it didn’t win the election. This nonsensical argument does reveal something very significant though about how you can almost daily find fault with your party’s performance (albeit without attacking it directly) and at the same time exhort people to vote Conservative. This duplicitous approach may satisfy your conscience but it doesn’t wash with me.

    • Denis Cooper
      Posted September 3, 2014 at 1:31 pm | Permalink

      Very amusing, you had me laughing out loud at several points.

      Incidentally Electoral Calculus has updated its four opinion poll charts:

      http://www.electoralcalculus.co.uk/polls.html

      and the upward trend for UKIP support has not broken as some might have been hoping; interestingly both Labour and the Tories are down about 1% while UKIP is up about 2%, and the LibDems are also up about 1%.

      I also note from Lord Ashcroft’s poll for the Claction by-election that UKIP is now almost as attractive to those who say they voted Labour in 2010 as those who say they voted Tory. However findings such as those have to be seen in the context of some people saying that they voted UKIP last time, when there was actually no UKIP candidate for them to vote for in Clacton.

    • Denis Cooper
      Posted September 3, 2014 at 3:57 pm | Permalink

      Just to take a look at my comment not yet out of moderation.

  10. acorn
    Posted September 3, 2014 at 8:12 am | Permalink

    Not much point in commenting on these “economy” type electioneering posts. I could write a book on all the things this coalition just got plain wrong in the last five years; using an out of date ideology left over from the Gold Standard.

    Anyway, pay is the third main component of public sector expenditure at £164 billion. Procurement is £200 billion and “current grants to persons and non-profit bodies” £235 billion.

    I surmise that maximising the taxation of the 99% little people is your raison d’être as an MP. Please keep in mind that taxation is a tool to control aggregate demand in the economy. Now is not the time to be throttling demand in the economy!

    Also, if you wanted, you could say public sector expenditure on services (TME) by economic category was £673 billion in 09/10 and it was the same in 13/14, if you exclude the effects of banks being classified to the public sector.

  11. agricola
    Posted September 3, 2014 at 9:41 am | Permalink

    The deficit is merely the monthly score sheet, what really counts is the debt. It is £1.2 Trillion and climbing. Government try to devalue the debt by printing money and various other ruses that reduce the value of our currency and diminish the debt.

    There is an overwhelming argument for simplifying the tax system and always staying below the Laffer curve. The next argument is that Government involvement in our lives is far too intrusive, and the tax burden to fund it unacceptable. Any one getting a good useful degree should get the hell out of the UK unless working for the UK part of an international organisation.

  12. Posted September 3, 2014 at 10:15 am | Permalink

    Whenever governments try to increase their revenue by raising taxes, it never seems to work quite like they imagine. Sure, the revenue from the particular tax which has been increased may rise, that is if it cannot be avoided, but other revenue raised from other taxes will fall. Increasing taxes doesn’t result in the anticipated increased revenue on anything like a 1:1 basis. So why is that?

    The answer isn’t difficult. Let’s look at a tax which isn’t easily avoided. Like VAT. VAT is very good at removing money from the economy. The higher the level of VAT the more it will bring in. But, what would have happened to that extra money if VAT had been lower? Of course it could have been saved in a bank account but more than likely it would have been respent into the economy. Even a lower VAT would recoup some of that spent money on the first subsequent transaction. But then there is a swathe of other government taxes. Income tax, NI, corporation tax, capital gains tax etc which will complete the mopping up process on every subsequent transaction. It would have all gone back to government anyway, only slight slower.

    Doesn’t this fit in with what we observe? ie Increasing taxes doesn’t bring in extra revenue, or close the deficit, but it does send the economy into recession.

    • Lifelogic
      Posted September 3, 2014 at 1:12 pm | Permalink

      Indeed.

  13. Posted September 3, 2014 at 10:30 am | Permalink

    One of Douglas Carswell’s parting shots was that the Government has lost control of public expenditure this FYR. It wouldn’t be a good idea to spook the markets. And there will have to be two more years of substantial deficit reduction after the election.

    • Lifelogic
      Posted September 3, 2014 at 1:11 pm | Permalink

      They have indeed largely lost control of expenditure and tax receipt are coming in lower than expected too. The need to stop spending and wasting.

  14. Denis Cooper
    Posted September 3, 2014 at 1:33 pm | Permalink

    I think you’ve convinced most of your readers here that there are optimal tax rates for maximising revenue, and present rates are too high to do that.

    • Brian Tomkinson
      Posted September 3, 2014 at 4:01 pm | Permalink

      Denis,
      He hasn’t convinced Cameron and Osborne though, nor has he persuaded them to stop spending and wasting. However, they can rely on his unswerving support in May next year when they will once more attempt to dupe the voters.

  15. Edward2
    Posted September 3, 2014 at 2:02 pm | Permalink

    Decades ago the tools used by the Treasury to adjust demand in the economy were mainly tax rates and credit controls.
    Unemployment and the balance of payments (ie imports versus exports) were the headline statistics.
    Today inflation and interest rates are the most important things.

    We seem to have forgotten that higher taxes reduce demand in an economy and can backfire on a Treasury that were expecting and depending on higher revenues.

  16. Posted September 3, 2014 at 3:55 pm | Permalink

    Thirty-five years ago when we bought our house the people who sold it were moving into a bigger house. These days, as most of the properties around here have large plots, people are adding to their existing house when they want more space, and the three/four bedroom houses are now getting five/six bedrooms with en-suite facilities.
    The main reason seems to be the escalating rate of stamp duty on the sales; it is now far cheaper to add to the existing house than trade up. As a result, although we would like to move to a smaller house, there are far less available, and in any case, the time the stamp duty is paid, on top of the other costs, we would probably have to spend some of our savings simply to downsize.
    The main problem now in this area is that there are now few smaller house, resulting in the absence of affordable houses for first time buyers as well as nothing for pensioners like ourselves to downsize into.
    This is, in my view, just one example of how taxation policy can change people’s choices and can defeat the objectives of another area of government policy as well as failing to bring in the expected tax revenue.

  17. Sam
    Posted September 3, 2014 at 5:51 pm | Permalink

    Where did the £3.9billion of lost Capital Gains tax go? Has this been explained?

    • Ted Monbiot
      Posted September 4, 2014 at 1:36 pm | Permalink

      It was just the actual revenues the Treasury got, versus their predicted revenue.

  18. REPay
    Posted September 4, 2014 at 3:16 am | Permalink

    I wonder whether the electorate cares whether the tax rates raise more or less money for the country. We have been trained to believe that the better off should pay more. The higher rates are what makes people happy. That is one reason Labour will form the next government.

    I realized some time ago that I am a member of a shrinking numerate minority of which you, and many here, are also a member.

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. 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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