Stop threatening the rich and start cutting taxes instead

by David Davis

In 11 days’ time the chancellor of the exchequer will deliver his third Budget. As this is the last Budget that will have a material effect on growth, jobs and so the deficit for the second half of the parliament, the stakes could hardly be higher. All three main parties are calling for an economic growth strategy – but there the consensus ends. If Labour and many Liberal Democrats had their way, we would get a Budget of populist gestures that would succeed in grabbing headlines but fail to restore growth.

The Budget must give a dose of effective economic shock therapy, not a populist placebo. It must include radical, pro-growth reforms to tax, regulation, energy, and infrastructure policy. So how do we do this? First, we should remember that it is small businesses that will create the majority of net new jobs in the next decade. Yet in January more small businesses said they were planning to lay off workers than hire new ones. No net new jobs means no extra employment tax revenue, no extra VAT and no reduction in state welfare payments.

The government must take radical steps to help entrepreneurs start new businesses and for small companies to grow to medium-sized companies. That is the real engine of wealth generation and job creation. The Budget should include major changes to tax policies, which focus not just on raising revenue but on boosting growth. So it must be a Budget of tax cuts and simplification, as well as spending cuts.

The government is fond of ruling out “unfunded tax cuts”. This phrase can, to put it mildly, be deceptive. Some tax cuts do need to be funded: Labour’s proposal to cut value added tax to 17.5 per cent would do little for long-term growth and cost the Treasury £12.5bn a year. But there are tax cuts that boost growth, and by increasing revenues and reducing welfare costs will more than pay for themselves. Almost by definition, these are not the populist cuts.

Abolishing the 50p rate of income tax is one such cut. The Howe/Lawson cuts in the top rate virtually doubled the tax take from higher earners, an experience that has been replicated in almost every country that tried it. We must decide whether the aim of tax policy is to punish the rich or to make them shoulder a bigger share of the tax burden. These are not the same thing. Gordon Brown’s 50 per cent income tax was and is a political gesture that drives revenue, jobs and talent out of the country, and leaves the less well-off to carry more of the burden. It should be scrapped. Similarly, some would like high capital gains tax to punish the rich but since the evidence shows the optimum CGT rate for raising revenue is in the high teens, that is where it should be.

It is said the Lib Dems want a “mansion tax” instead. Since cutting the top rate will generate revenue, this is a political not an economic demand. It is a tax on bricks and mortar not on wealth, and as such makes about as much sense as a window tax. It would probably hit elderly widows harder than billionaire bankers. It was precisely to avoid penalising people who are cash-poor but who for reasons of history, family or sentiment still live in large houses that the whole council tax system was designed.

If we really need the £1bn such a tax could generate, we should close the offshore company house-purchase loophole, which would generate almost as much, with more economic logic.
We should also scrap national insurance on all new jobs created by companies with fewer than 50 employees. Like abolishing the 50p rate, this looks expensive, but will cost next to nothing in lost extra NI and will save huge sums. With unemployment at a 17-year high, tax cuts for employing businesses are vital.

Radical tax policies should be accompanied by deregulation. In 2011, regulations cost British business more than £110bn. There should be far-reaching exemptions for small businesses from laws that make it prohibitively hazardous to create jobs, including working-time restrictions, lengthy parental leave and excessive equality laws – at least for the first few years of employment. The government must also press for this in Europe, where at least half of all business regulations originate.

George Osborne must also recognise that our energy policy drives up prices, damages business and costs jobs. So he should scrap our pledge to cut carbon emissions by 80 per cent by 2050. This and other “green” policies have caused huge rises in energy costs for business. The effect on energy-intensive industries is particularly acute. Second, we should cut costly subsidies for inefficient and unsightly wind farms. In private, ministers brag about being ahead of their windpower targets. That means the subsidies, costing more than £500m a year, are too generous.

On infrastructure, we need a sharp focus on projects with an immediate return. The government should scrap the £33bn HS2 project and use £5bn of the money saved to take superfast broadband to every front door, including in rural areas where it will have the most positive impact. If we do have to spend so much money on the railways, the government should upgrade the existing network and unblock its well-known bottlenecks.

The chancellor is right to press on with public sector spending cuts. I sympathise with those who say he is not pressing hard enough. He should certainly not flinch over welfare reforms. These, and the Lib Dems’ one sensible policy – cutting tax for the low paid – will provide a real incentive to work. Labour’s economic plan would not put us at risk of losing our triple A rating; under them we would already have lost it.

The chancellor’s problem is that Lib Dems are blocking the policies we need to develop, which will ultimately mean more unemployment and minimal deficit reduction. If Britain enters 2015 in that position, there will be little left of the Lib Dems after the next election. Their many sacrifices in the coalition will result in the ultimate sacrifice at the ballot box. Somebody needs to explain to Lib Dem MPs that their interest lies in collective success, not collective dissent.

Supply-side reforms, such as tax cuts and deregulation, will deliver growth but the benefits will not be felt for at least two years. The Budget is the final opportunity for measures that will produce perceivable, positive results before the next election. The government must bite the bullet and go for growth, now.

First printed in the Financial Times, 9 March 2012

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