The Budget Red Book not only forecasts a rising growth rate in the second half of the present Parliament, but also forecasts rising inflation and rising interest rates.

           The forecasts for the Retail price Index, the older view of inflation, says that this measure of inflation will hit a low of 2.3% in 2013, will rise to 3.6% in 2015 and to 4.0 the following year. Wages will also be rising , reaching a growth rate of 5.6% in cash terms by 2016.

            Against this background the forecast also assumes rising interest rates. Gilt rates are estimated to rise from a low of 2.3% in 2011-12, to 3.5% by 2014-15 and 3.8% the following year. The CPI stays on target despite these changes.

          Many politicians think of taxes as being a way to tax behaviour they do not support, or to tax people they dislike. There is a competition in the Commons to think up more and more groups of people – bankers, fat cats, the rich,polluters, company directors, etc – that ought to be taxed because they are not liked. It’s also popular  to think up conduct MPs dislike in  others.   Drinking, smoking, travelling by car, getting on a plane ,creating carbon dioxide,dumping waste,living in a big house, are also thought by many MPs to be a good case  to justify higher taxes. This does not stop many MPs themselves  liking a drink, driving, getting on planes whenever possible, or even living in a big house.

          So I thought it was time to ask how are the enthusiasts for tax  getting on? Are they now taxing the “bads” enough? What do they think is bad that ought to be taxed?

          On this analysis, which I understand has its limitations, the results are very surprising. The biggest bad according to the tax system is going out to work. If you dare to work hard and be successful you are commiting the biggest crime of all.  Income Tax and National Insurance on employment accounted for 46% of all taxes raised in 2011.

         Next on the hit list is spending. Almost 19% of tax raised comes in the form of VAT on purchases. Do not be a shopper.

         Third on the list is property, accounting for 10.5% of tax raised. The taxes are higher if you dare to buy a bigger home or live in a favoured district.

         Fourth is making a profit by running a company. Corporation tax pulled in 8% of the total.

         Fifth was going to work or the shops by car, or flying to sell goods abroad or take  a  holiday. This accounted for nearly 7% of taxes raised.

         Drink is sixth, at just 1.8% of tax levied in 2011, and tobacco seventh, at 1.7%. Environmental taxes including the climate change levy came well below 1%, though this popular source is destined to go up in the years ahead. There are also plenty of surrogate taxes in the form of higher consumer prices to tackle people’s love of “bads”.

            Some will respond by pointing out that tax has additional aims to stopping bads. Its main aim, in my view, ought just to be to raise necessary revenue to pay for public services. Others will say the central aim of taxation should be to make people more equal. Nonetheless, many who like taxes see them as a way of influencing conduct and admit they do just that. If they think higher taxes on drink deters drinking, higher taxes on tobacco deters smoking, and higher taxes on motoring deters driving, why don’t they see that higher taxes on earning and working hard deters working, and higher taxes on profits and enterprise deters job creating investment ventures?

            Last week there was a break through. I was phoned by a Dail Mail journalist. He had read my website and wanted to write a piece about the overall increases in public spending in 2010, 2011 and 2012.

             He wanted to know where he could verify my statement about the government’s own figures. I told him they were all in Table 1.1 of the OBR 2012 Report, p11. ( as well as elsewhere) He looked it up and expressed surprise that it was so close to the front and so prominent. I suggested it showed that most media commentators and journalists do not  read the original documents. He duly wrote the piece, and the Mail on Saturday included comment on it in their leader, saying spending is too high.

            At 10.35pm  last night (11.35 adjusted) the BBC rang and asked me if I could appear to review the papers on the Marr show. I said I was committed in the  constituency on Sunday morning so that was not possible. They said they wanted me to be able to repeat that spending is going up, in my view. I said the point it is it has been going up according to the government, so all they had to do was read it out and apologise for consistently implying that overall current spending was being cut. They said they were interviewing Danny Alexander in the morning. I bet they did not put to him that spending was going up – they still can bring themselves to admit what is obvious and fully reflected in the official documents.  I would be interested to hear from anyone who saw their show.

             They do not report news. The report spin, or the world as they imagine it to be.

                   Over the last few weeks there has been a new intensity to demand more and higher taxes. There has been a crescendo in the voices of media commentators, various MPs, and  the left of centre political parties. All they want is tax. Tax is all they want.

                    I have got tired of having to answer endless media queries about my views on a Mansion Tax, a Wealth Tax, an expensive houses tax, another bankers’ bonus tax, a land value tax, a pension savings tax and the rest. Let me anwer just one more time.

                   The UK is not undertaxed.  If you could  tax a country to prosperity our prosperity would be soaring after all the extra taxes and tax rate rises of recent years. You cannot tax a country to prosperity.

                   We are not short of new taxes. In recent years we have had the Carbon Tax, the bankers bonus tax, the Bank balance sheet tax, the landfill tax,  higher Capital Gains Tax,  higher Income Tax rates , Congestion charges, additional oil and gas taxes, higher fuel duty, higher VAT, the aviation  levy, higher car park tariffs from public sector car parks, and a host of others.

                      My view is simple. The UK is now overtaxed. Taxation is now above the optimum level that will contribute to faster growth and rising prosperity in the future. We are overtaxing now in ways which will limit tax capacity in the future, because the economy will be smaller as a result of the current tax levels.

                   I suspect we are also at or above the level of sustainable tax. There are limits to how much you can get out in tax in any given democracy. There is a danger now, as some have written on this blog, that current tax rates are seen as too high by those who have to pay the taxes, and some of them will find legitimate and some illegal means of  not paying all these taxes.

                            My remedy is to set tax rates that maximise the revenue from that particular tax, where the tax needs to be levied. I also think we should return to Mr ( as he then was) Lawson’s admirable approach of regularly abolishing smaller taxes that are expensive to collect but irritating to pay. It would help to improve the mood and raise spirits, if people thought there will be an end to this ever increasing demand for our money, instead of every year making it worse. We will need to get more out of people in the future to pay for the state. It will be easier to do that if we set tax rates now, and a smaller range of taxes now, that speed growth and make collection easier.

                           Sometimes less is more. Grow the cake faster, and then the public sector slice can be larger whilst everyone else is still better off.   The government’s own forecast shows total income tax falling in 2011-12 compared to 2010-11, thanks to the large fall in top earnings and the top tax take. It then shows income tax rising to be just 1% higher in cash terms in 2012-13 than in 2010-11. The government needs to ask itself why Income Tax is in such a poor way with these higher rates.

                           The UK is saturated by tax demands. Some are leaving the country altogether, some are moving savings and assets abroad, some are working less, some are deferring income, some are finding ways round the tax system within the UK.

                     The government has decided to suspend the Sunday trading laws over the Olympic period. Should they go the whole hog and repeal the law for good?

                      Limited Sunday trading was introduced to appease two vocal groups who disliked the idea of shops open on Sunday. The Christian Churches said they wanted to keep Sunday special as the Lord’s day. The Retail unions said they wanted staff to all have Sundays off. How valid are these objections today?

                        There is nothing stopping Christians maintaining Sunday as a special day, as the Church going day of the week. Retail staff who are also Christians can ask to work shifts or on days that do not clash with Sundays. No-one has to go shopping on Sunday if they disagree with it. There are now so many shops open on Sundays that it is no longer possible to claim that Sundays are special, or protected from the claims of Mammon

                         The Unions would have a point if staff had to work seven days a week instead of five. The restrictions on Sunday trading apply now to larger shops, not to the many small stores where there may already be limited flexibility over hours of work and days of employment. If the larger shops were allowed to trade for longer on Sundays they would have to come up with sensible packages of hours and shifts to atract a range of potential emplyees. They should not have to force Christians to work Sundays against their will, and would soon get a bad reputation as an employer if they tried to. Some employees might like to work on a Sunday and have a different week-day off instead, as that might work  better with their other commitments.

                          I think the government should change the law not just for a few weeks this summer, but for the longer future. Does it make sense to restrict the hours of the most successful retailers? Does it help the Higgh Street to close parts of it down on Sundays? Can’t we now find an answer to the objections?

           People working in the private sector get used to having to be polite, engaging,friendly in order to win business and retain customers. The smaller the company, the more individuals in it have to go out of their way to woo and charm, to retain and impress. Everyone in a competitive business knows there are others wanting to take their order or their customer away from them. Everyone accepts the customer is king or queen. All know that courtesy is part of service.

          Most of the time customers respond in a similar vein. Politeness and concern can beget politeness and concern. There are a few  who abuse the private business. There will always be someone who thinks it’s fine to be sick  from excess drink in the taxi or acceptable to demand money back for a fault which the business did not commit, or to be aggressive with the staff. Business has to learn to deal with the troublesome minority as best they can within the rules of the game. Customers are usually in the right, and nearly always think they are.

          Many public servants also observe the code that they should always be polite, helpful and concerned for their clients. After all, the very ideal of public service is designed to offer a better standard than the commercial market for some of the most sensitive services on offer.

               However, it is different with some public services. The BBC blasts its potential customers with aggressive letters about licence payments, knowing they have the force of law behind them. Public services can decide when they are available and when they are closed to suit themselves rather than to meet the convenience of their clientele. Some GP surgeries I am told are difficult to contact and make arranging an appointment a complex matter.(I do not  currently have cases for this problem in   Wokingham). Some hospitals book people in for operations which are cancelled at short notice, or give appointment times which the Consultants do not observe. When it comes to presenting the bill, the authorities can be demanding and unwilling to accept that people find the complexity of their process difficult to handle. I receive  various cases from people who have made honest mistakes over Council Tax, car park fees and Income Tax, or have been on the wrong end of the authorities’ mistakes, who need help. People have to devote large amounts of time these days to compliance. If they make a mistake with the public sector car park charge, with the Congestion charge, with the tax return, with the business VAT return, with the school catchment application or with the way they put their refuse out they can find themselves on the wrong end of an angry public authority.

              This attitude of some in the public sector of knowing the strict letter of a very detailed and voluminous law and wishing to enforce it come what may can generate an equal and opposite reaction from the public. It leads to “I know my rights”. It can help generate unfairly aggressive responses from members of the public to any shortfall or mistake they perceive by those in the public authority. It can lead to a coarsening of the language and hardening of the heart.  It ceases to be a generous public service welcomed by a grateful member of the public. It becomes a battle between the client and the provider, between the individual and the public authority.

                           In my commentary on the 2010 and 2011 budgets I pointead out that the large cash increases in total current spending meant it was likely there would continue to be real growth in this spending. Most other commentators talked about deep cuts.

                         Now I have a new ally in arguing this case. The government and the Office of Budget Responsibility  tell us that real public spending rose by 1.5% in 2010, by  0,3% in 2011 and is forecast to rise by another 0.5% this year. Of course there are individual cuts, to help pay for the increases in health, overseas aid, EU spending and the other growing areas. It is however importtant to understand that there has been and still is a rise in overall current spending, not just in cash terms but also after allowing for inflation.

                           I also said after previous budgets that I thought the forecast for such a huge tax revenue rise over the five years was optimistic. It is interesting that the government now agrees with this, and has cut the forecast by 13%.

            The government’s planned deficit reduction strategy rested on a large increase in tax revenue. The June 2010 budget set out to increase annual tax revenue by £177bn in 2014-15 compared to 2009-10. The Coalition VAT increase added to the outgoing Labour government Income Tax and National Insurance increases were expected to do the job, aided by good economic growth over the ensuing years. This would allow the Coalition to raise current spending by £90 billion a year in cash terms over the period, and cut the deficit substantially.

            Mr Osborne’s third budget, two years into the Coalition government, aims to raise tax revenue by £154 billion a year in 2014-15 compared to 2009-10, £23 billion less than the original proposals.  A bit of this fall is for the good reason that the second and third  budgets have brought some Income Tax cuts to standard rate taxpayers through the further increase in the threshold. The rest of the shortfall is the result of two other trends.

 The first is slower growth, meaning less revenue from a less buoyant economy.  The second reason is the falls in revenue brought on by higher tax rates.  The latest Treasury forecast now assumes that self assessment income tax will fall by 10% this year compared to last year, despite the higher inflation and growth which would normally increase it. The higher 50% rate is having an adverse impact. The Treasury also now forecasts a fall of almost 10% in the Capital Gains Tax receipts next year, as we feel the full effects of the higher 28% rate, despite the good gains on London property and many business assets since the market bottom in 2009.

                 The government’s study of the 50% rate argues that the impact of the 50% tax could be negative, but their best estimate is that dropping the rate to 45% would lose the Treasury just £100 million in tax income. They rightly hedge their figures around with many uncertainties.  They also have errors in their report – for example Chart 5.3 tells us that only 250 people in the UK had incomes of over £150,000 in  2010-11, when it must have been many times that. They show that the incomes of people on £150,000 a year or more fell by 25% in 2010-11, which implies a very large loss of revenue. As the official forecast is for a 10% fall in self assessment revenue we must assume that the fall comes from this sharp drop in top incomes, offset by some gains on lower incomes.

                 They show that the mean highest rate for the G7, the G20 and the EU 27 is below 40%. The UK was tax competitive when the government first cut it to 40%, but has long since been overtaken by the rest in the race to attract talent and enterprise.

                  This budget does not forecast any further economic weakness, and estimates that total borrowing over the five years will come out a bit lower than the high figures of the Autumn Statement 2011. It still leaves the UK state adding £528 billion to net borrowing over the planned five years of this Parliament despite the credit of £28 billion of Royal Mail pension assets. The Chancellor has adjusted the increase in spending down a little, from an extra £90billion in Year 5 to an extra £86 billion. I think we should ignore Table 2.3 of the Red Book where it says total public spending will be just £733 million, as I think they should have put “£ billion” rather than “£ million” at the top of the table.

                 The immediate politics of the budget are likely to revolve around the treatment of pensioner incomes and the reductions in tax credits, which offset gains being made for some through raising the tax threshold. Assessment of the longer term budget judgement will rest heavily on whether the various measures proposed to boost growth do do just that.  We will return to that story another day.

 This is another  leaked  letter from Dame Lucy Doolittle, Director of the unit for co-ordinating cross cutting initiatives and partnerships to Dr Roy Spendlove, Miscellaneous Projects.

          Dear Roy,

                          I am writing to ask you to take up the task of developing an infrastructure programme. I know you were very concerned when the previous government decided to cut capital expenditure. You argued at the time that it would remove jobs from the construction industry and harm prospects of recovery. I understand you were disappointed when the Coalition government was only prepared to reinstate a small proportion of the cuts in their first budget plans in the summer of 2010.

                            I have been involved in a series of high level cross departmental discussions including  the Treasury to   try to reinstate some of the lost projects. Ministers have come to see the importance of rail, road, energy and water investment. They have even been prepared to reconsider their objections to more London airport capacity. They have now asked us to come up with imaginative ways of financing these projects, so they can have the advantage of the stimulus to activity, without the spending scoring against the public debt as traditionally defined.

                           I appreciate your expertise in this area, as I remember you did a lot of work for the previous government  in the areas of PFI and PPP. This time round we should also bring into consideration the new more flexible relationships with a couple of banks that have large state shareholdings. We can consider what use can be made of the government’s current ability to borrow at cheap rates, thanks to quantitative easing.  There are new precedents in the form of Credit Easing, Quantitative Easing and the new mortgage scheme. The latest £20 billion  National Loan Guarantee Scheme, for example, does not raise an additional contingent liability on the Treasury, as it is scored under the old Bank of England asset purchase facility. We have been able to argue that it is merely a transfer from the Bank’s ring fenced asset purchases with Treasury guarantee to a direct Treasury balance sheet guarantee. The full inclusion of the Royal Mail Pension fund allows us to credit the assets in a helpful way for the current deficit, while allowing long term amortisation of the liability.

                           I would also like you to widen the work to consider the role and future of quantitaive easing. Whilst the Bank has the lead on this, it does require consent from the Treasury. Given our co-ordinating role in this important infrastructure work, I think we need to be ready to argue the case about the future size of the programme and the uses it can be put to. The Bank’s use is narrow, confined almost wholly to buying government debt in the secondary market. Whilst this has the welcome effect of keeping government borrowing rates down, it does not necessarily help the rest of the economy as  much as it might. I think we need a way of having more control over the  spending of  the money created. You appreciate the sensitivities in how this can be described and presented.

                     We see the European Central Bank has approached it differently and lends three year money to commercial banks, who in turn can then lend to governments or high quality companies. Maybe we need to suggest that the Bank of England should widen out its activities, as it could make our task much easier in finding the money for these programmes.

Yours ever

Lucy

         The last Budget book in March 2011 told us that the Coalition government planned to increase current public spending by 16% over the five years to 2014-15. It forecast  an increase of 11% in total public spending in cash terms, as it has left quite a few of Labour’s cuts in capital spending in place. It estimated it would increase tax revenue by 36%, bringing the deficit down by 70% as a result. If the government enforces tough public pay freezes and improves public sector buying as promised, these cashspending  figures translate into little change in real terms.

          The Autumn Statement cut the forecast revenue increases, as  the government decided to turn more pessimistic about the likely growth rate of the economy.  The March 2011 forecast of total extra borrowing of £485 billion over the five years soared to a forecast £563 billion as a result.

              This 2012 Budget is unlikely to have to report more bad news about less revenue or more involuntary spending. It is likely to worry about growth, as the growth rate in the economy is central to achieving the large forecast increase in tax revenues the strategy rests on.  The government is likely to concentrate on two major areas to promote growth.

              The first si they will seek a private finance route to reinstate the cuts in public capital spending they inherited – or alternative projects to take up the slack in construction. We have seen today the outlines of a scheme to build more roads. Mr Cameron’s speech has also promised decisions on airport, energy  and water capacity. We know they are working on away to tap pension fund money to finance better infrastructure.

                The second is they will seek new ways round the finance blockage caused by the tougher regulation of banks. The banks are struggling to meet much more stringent capital requirements. That means they lend less, or fail to expand their lending, as they seek to improve the ratio of capital to loans.  The government is likely to try to find a way round this regulatory  constriction. They have announced a mortgage loan extension scheme, and are now poised to announce help for lending to small and medium sized enterprises.

                  It might be cheaper and easier simply to relax the capital requirements of the main banks. After all, we are now all meant to believe in counter cyclical regulation. That means allowing lower ratios of capital to loans when the economy is in or recently out of recession, and then demanding higher amounts of capital when the economy is in  danger of overheating.

                    The budget also has to resolve how to tax the rich successfully. The Treasury now forecasts a fall in CGT revenue next year by some  £500 million as the higher rate makes its full impact. Income Tax revenue was poor this January, with self assessment revenue down in cash terms.  The past moves down in the top rate from 83% to 60% and then to 40% all boosted top rate taxpayer revenues massively. Will the Chancellor go for more revenue, or play to  the gallery that likes soak the rich and successful taxes even if they do  bring in less?  To me the art of taxing the rich is to tax them in a way which makes them stay and pay.