I was pleased to hear yesterday through the media that the budget will include measures to boost a private sector recovery at the same time as taking action to control the public deficit. As I have been arguing, the country needs hope and budget control needs the prospects of many more private sector jobs. Curbing the deficit means transferring people from the public sector payroll – be they on benefits or in non jobs – to the private sector.
So what measures can and will they take to boost the private sector? The likely measures include:
1. Cutting employer’s National Insurance, the tax on jobs.
2. Putting tapers and Indexation into Lib Dem plans for higher CGT.
3. Cutting the overall level of Corporation Tax to 25%.
4. Cutting the small companies tax rate.
5. Exempting NI on the first ten jobs created by small business.
6. Sweeping away some of the regulations and set up costs on new business.
7. Encouraging new groups and individuals to set up schools
If they want to send out a strong and positive message that the UK is re-opening for business after the deep recession they could also:
1. Set a CGT rate of 10% for gains over 4 years
2. Say Corporation Tax is coming down to 20% over the life of this Parliament
3. Announce a return to 40% top Income Tax rate for 2012
4. State small business profits tax will not go above 20% this Parliament
5. Announce a plan to cut business regulatory costs by £20 billion through the Great Repeal Bill
6. Offer areas of public sector work to private sector franchise/state employee buy out
7. Announce asset sales programme from public sector
8. Split up some government contracts to allow smaller businesses to compete
9.State that banks now have enough cash and capital, allowing them to lend more to the private sector
10.Amend the tax rules on private sector pension contributions so more pension funds can be saved
11. Boost tax free savings plans for investment in business
June 20, 2010
Rather than uniform cuts in business taxes across the UK it would be better to establish a system of differential taxation to encourage more uniform economic development.
For example, with tax rates varying inversely with local per capita GDP, or varying inversely with the proportion of the local economy which depends on the public sector, or a combination of the two.
Otherwise during and after the recovery we'll once again see private businesses preferentially concentrating development in the south east corner of the island, leaving other parts over-dependent on public sector activities and on social security payments.
Of course it would be necessary to prevent companies reducing their tax bills by setting up shell offices in low tax areas without providing significant local employment.
June 20, 2010
You previously posted an excellent article on how much can a government tax.
It would be good if a similar debate was on how you raise or lower the tax take.
In my opinion this is best achieved by changing the basic rate of income tax. It is straight forward to manage and difficult to avoid.
One of the biggest loopholes just now is owner managed companies paying dividends rather than salary to avoid NI and this should be stopped.
With regard the likely measures being brought in, apart from the taper relief for CGT which is a good thing, my opinion is they are a mess especially the NI rises and are likely to cause businesses as much grief and confusion as it will save them money. There is also the opportunity to start different companies each year to take advantage of the NI saving.
The tax system is a mess and more targeted measures are only going to make things worse.
June 20, 2010
So you're encouraging owner managers to take a passive rather than active role in their Company in order to take dividends without NI? How will this help the economy? Better to incorporate NI into an honest income tax rate.
June 20, 2010
So you're encouraging owner managers to take a passive rather than active role in their Company in order to take dividends without NI? How will this help the economy? Better to incorporate NI into an honest income tax rate.
I am puzzled by your reply, my point is nothing about the role of owner managers, my point is about the common practice of paying dividends rather than salary to save tax and NI.
This has been a obvious tax dodge for the last ten years and widely abused. It seems particularly annoying that NI is going up again and yet these owner managers who already pay too little tax are unaffectedby this.
June 20, 2010
Nothing to disagree with here John, it's not welfare dependents or public sector jobs that will get the economy growing, it's the private sector.
The safety procedures on airlines always emphasise that in the event of an emergency you must get your own oxygen mask on first before trying to help dependents, and there's a good reason for that guidance.
June 20, 2010
JR: "I was pleased to hear yesterday through the media"
Given how much you complained about the previous government's tactics of leaking news to the media before announcing it in parliament, there is a strong element of sarcasm in the first line of your post, but I'd be interested to know your real thoughts of this government's continuation of this policy?
I think it's more than a little hypocritical of Cameron's cronies to be doing this after the fuss his party made about Labour doing it in the past.
June 20, 2010
John, another excellent post.
Unfortunately you're thinking as a conservative so I doubt much of your wish list will ever make it onto the statute books under this administration. Cameron may be a Conservative but he really isnt conservative.
June 20, 2010
I would like to see Corporation tax not only cut to 25% but a promise made that thec total CT take will not be allowed to rise. Thus if, as the Laffer Curve suggests a 12% cut was followed by at least a 12% increase in declared profits that would mandate a further such cut. Making such a promise would have zero immediate cfost & would greatly increase business confidence (assuming business men have more understanding of the curve than many politicians).
June 20, 2010
This sounds good I hope it is accurate. i am a director of a small social enterprise dealing in equality and diversity. We have been around for 10 years and I look forward to hearing what the budget will be doing for small business, we have faced some difficulties over the last 6 months due to the fear of job losses in the public sector the banks have not helped much so I am looking forward to seeing some assistance. I am holding my breath so dont disappoint.
June 20, 2010
Perhaps we need to consider ring fencing the property related lending on banks' balance sheets. It's the UXB that makes them fearful about making other loans.
June 20, 2010
Dear Sir John Redwood
Another excellent analysis of our economic situation in Britain and of how to put it right. I am likewise concerned that, given the influence of the Liberal Democrats and Sir David Cameron's reluctance to do anything that might risk "destabilising" the Coalition Government that deep cuts in income tax or of Corporation Tax will not be forthcoming. The Liberal Democrats, who are by nature Socialists will insist that "the rich" bear the brunt of fiscal restraint neded to reduce the budget deficit, that means the wealth creators and big businesses will be unlikely to see any big reductions in their tax bills any time soon. Our Left-Wing partners in the Coalition Government will, I fear, not allow Sir David Cameron and Sir George Osborne to reduce the top rate of tax back to 40% when benefit bills are being frozen or when other departmental budgets are being cut. But if our economy is to cope well with fiscal austerity and still grow, we need the deep spending cuts to be accompanied by cuts in income and business taxes.
We also need cuts to the excess red-tape that afflicts businesses in Britain, much of which comes from the European Union. But the Liberals neither want the Conservatives to be too hostile to the EU, to get them to back off. Unfortunately Sir David Cameron has to stand up to the EU with their insistence that they vet our Budgets, their overbearing controls on Britain's Alternative Investment and Hedge Fund businesses, and politely tell the European Union where it is not wanted.
Unfortunately, this requires courage. You Sir, are in an excellent position to pass on to Sir David Cameron an urgent exhortation; he must not be pressurised by the Liberals into adopting policies likely to harm our economy and he must stand up to the European Union. The worst the EU is likely to do is threaten to fine us, and if we dont pay the fine, what then? They're hardly likely to expel Britain from the European Union when this country gives them so much money each year!
Sir David Cameron must not fear the EU nor must he fear the Liberal Democrats pulling the plug on the Coalition; but he must fear being pushed into making policies that will do enormous harm to the British economy and engendering the wrath of the electorate at the next General Election. One thing Sir David Cameron needs above all else is to stick to his guns, refusing to back-track on decisions even when the going gets tough. There must be deep unpopular spending cuts combined with some tax cuts that many may see as unfair; these have got to be seen through if our economy is not to end up in meltdown.
Sir, you will be aware of the phenomenon of Peak Oil, the oil is indeed running out world-wide. If Britain does not have many more new nuclear power stations (and a new Uranium recycling unit) within a decade the lights will start going out. We need to wean Britain off oil and gas, we need to invest in developing and then producing electric cars and buses and that means overcoming resistance from environmental campaigners and the Liberal Democrats to safeguars our long-term energy security. Again, Sir David Cameron needs to be told very clearly that he must fear the electoral consequences of nationwide black-outs, not the Liberal Democrats pulling the plug!
Yours etc,
June 20, 2010
It would also be a boon to small businesses if government departments took a more helpful attitude. For instance, VAT. The administration of returns has changed, and I can only think that it is more to do with benefiting the department rather than the business with which they deal. VAT returns MUST be made online, but this does not allow for the fact that there large parts of the country that have poor broadband speeds, and in some cases the best you can get is dial-up. Many small business will be in places worst affected, and the prospect of improvements are not hopeful.
This is not the way to encourage business to start nor to expand.
June 20, 2010
Friends of mine run a small family business; Husband, wife, son and two other employees. The wife does the accounts, ordering, etc, which takes one day a week and her other four days are spent reading, and dealing with where necessary, the heap of paperwork generated by government departments, quangos, local councils and so forth. As she says, Every bit has to be read just in case there is some nasty penalty for not complying. Frequently professional advise has to be sought, and of course paid for, in order to ensure that some new regulation has been interpreted correctly.
Whilst a company like Tesco can afford to pay the salary of a full time person to do such work, and it represents a small percentage of their wage bill, for one out of five people in a small business to have to spend virtually all their time on government inspired paperwork is just not viable.
June 21, 2010
Seconded.
June 20, 2010
Why do you not include on the list restoration of the personal allowance for those on 100k at the same time as talkign about removing the 50% rate. Arguably the former hits far more than the latter.
June 22, 2010
John, I've read your views on CGT and how raising it actually results in lower CGT taken. That may be true, however if people convert bonuses into property and shares so they pay less tax as opposed to taking a cash bonus, removing this loophole (by raising CGT) must boost the tax taken by income tax – even if it means overall CGT taken is less. Surley this has to offset your argument about falling tax intake somewhat?
June 22, 2010
Yes VAT has risen – I would have made the rise 5% to 22.5% and would have brought it in as of January 2011.Between January & March 2011 that would raise £2 billion a month and would have pared an extra £6 billion off of the PSBR in 2010-11 taking the deficit down to £143 billion.Then from April 2011 the £26 billion could fund a basic flat rate basic personal tax allowance of £10,000 p/a with no complex claw backs for either the over 60's/65's or for a person with an income of £100,000+ and the other £4 billion could pay for an extra corporate tax cut.By 2014-15 that would leave rates at 21%&19%.The aim should be to cut rates to 15% as soon as resources allow.
Lady Thatcher & Lord Howe hoisted VAT in 1979-80 to fund necessary tax changes while putting the money saved from public spending cuts into deficit reduction.That helped get an economic resurgence going from 1981-82 onwards.
Also according to Reform you could cut the fat in the NHS via more efficient management without damaging patient care to save £12 billion p/a.So by 2015-16 the fiscal deficit would not be £37 billion but rather could be down to £25 billion & a structural deficit of £8 billion.
So they should have been bolder on health service reform & VAT as we need a smaller state & less public borrowing.Also there is a need to make work pay via a simpler & more generous basic personal tax allowance and lower corporate tax allowances.They should have cut corporate tax allowances so that rates could be cut to one 18% rate as of April 2015.That means more efficient investment decisions and thus faster economic growth owing to more rational actions by investors -rather than actions dictated by complex tax breaks.
Being bolder would have benefited Britain in my view.