UK: SMITH ON ECONOMICS - A TIME FOR TINKERING WITH TAXES.

UK: SMITH ON ECONOMICS - A TIME FOR TINKERING WITH TAXES. - As the Budget looms, David Smith takes a critical view of a system which puts pressure on Chancellors to pull tax cuts out of the hat to preserve their own job and those of their colleagues.

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Last Updated: 31 Aug 2010

As the Budget looms, David Smith takes a critical view of a system which puts pressure on Chancellors to pull tax cuts out of the hat to preserve their own job and those of their colleagues.

There are plenty of people, myself included, who regretted the passing of the traditional ritual of the spring Budget. There was, it must be said, a degree of self-interest in this. Anticipation of the Budget provided a ready source of material during the bleakest days of winter. The day itself, usually in March, when the Chancellor emerged from 11 Downing Street, wife on one hand, Gladstone's battered red box in the other, often seemed to offer new hope, like green shoots emerging from the frosty earth.

A late November Budget (this one will be on 29 November) is not the same. It is hard for even the most ebullient Chancellor to raise the spirits when the days are shortening. It is slap in the middle of the Christmas shopping season, when the last thing that retailers want is renewed uncertainty over tax or interest rates. And any tax announcements have to compete for attention with complex, often tedious, public expenditure changes. Indeed, it will be a long time before I regard the November Budget as anything other than an extended Autumn Statement (traditionally the Treasury's other big set-piece event of the year, when it published its public spending plans).

The unified (tax and public spending) November Budget is, however, regarded as a big success by the Treasury. It is seen as having contributed to a new realism with regard to public spending by ministers, the alternative being the immediate announcement of even higher taxes. It looks to be here to stay.

It is sensible for governments to review public spending provision on an annual basis, although ideally it should be possible to set out tough plans for three or even five years ahead and stick to them, in spite of those electoral and other pressures which usually result in additions to the plans.

Consider, however, the recent record on taxation. In the late 1980s we had substantial tax cuts, made possible by the fact that the public finances appeared to be in such a healthy state that the National Debt would be paid off well before the end of the century. But by 1993, we had the announcement of record tax rises by Chancellors Lamont and Clarke, brought on by the fact that, without them, public borrowing threatened to spiral out of control. Now, before those tax increases are fully in place (the second tranche of VAT on domestic fuel bills will not take effect until next April), the talk is of tax cuts again and the clamour is considerable. This represents, by any standards, a tax roller-coaster. And it is one that has turned the fiscal policy conventions of the 25 years or so after the second world war on their head. The recent pattern has been for tax cuts during the boom years, followed by the announcement of higher taxes when the economy was still emerging groggily from a recession that had wrought havoc on the public finances. On present indications, taxes will be lowered when the recovery is strong enough not to need them. And so on. Can this be sensible?

Consider too the dry detail of the Budget, the many announcements dreamt up by Treasury, Inland Revenue, and Customs and Excise officials in the months leading up to the Budget. These make up, year after year, ever fatter Finance Bills, the main purpose of which appears to be to keep accountants in gainful employment. No tax system can remain the same indefinitely. But can it really be the case that Britain's tax system is so bad that it is in need of this kind of major overhaul every year? I doubt it. Were it not for the fact that there is a Budget each year, and that the Treasury is required to fill it with tax changes, many of the tax proposals that we will see on 29 November would remain locked away in regulation-grey civil service filing cabinets, where they belong. They are, in truth, tinkering for the sake of it.

The big picture, as the chart shows, does not offer any support to the idea that tax cuts are justified, either this year or next. The public sector borrowing requirement, on Treasury forecasts, may get back down to zero by the turn of the century, but only if growth continues in an uninterrupted fashion. It could happen - the upturn of the 1980s persisted for some nine years. But it would be unwise to rely on it. The existence of the annual Budget puts pressure on the Chancellor to pull politically popular tax cuts out of the hat. There is a presumption that each Budget will bring some new and exciting change. In fact, the evidence of recent years is that such changes act to destabilise the economy.

As for detailed tax changes, there is nothing to stop the Treasury from announcing these, as and when they are necessary, at any time during the year. Waiting for the Budget, particularly when the issue is the closure of some tax loophole, is an inefficient way of proceeding. Other changes, such as the indexation of personal tax allowances and excise duties could be effected automatically, without the need for any parliamentary show business.

But surely, in spite of a tendency for tax changes to be badly timed, many have been highly beneficial: the Lawson corporation tax reforms of 1984, for example, with a gradual shift from a corporation tax rate (52%) alongside generous (100%) capital allowances, to a lower tax rate but with less generous (25%) allowances. But Chancellors do not need an annual Budget to put into place such strategies. The corporation tax reforms are a case in point. Announced in 1984, they took four years to complete. The objection then is to a system which encourages Chancellors to introduce new pet schemes each year with the hope of generating favourable headlines. The ritual of the annual Budget has served the economy poorly. If Kenneth Clarke wants to go down in history as a reformer, he should abolish it.

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