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We need to tackle the deficit, but don’t hit risk-takers with tax hikesJanuary 24, 2021
By Andrew Griffith MP, founder Chairman of C4EG
With the UK vaccination programme making excellent progress it has finally become possible to start thinking about normal life emerging again over the months ahead. The Government has supported businesses throughout this crisis, and it is important that economic support is maintained for sectors that need it whilst restrictions remain in force. It remains right to protect people and jobs. But for our nation’s finances the pandemic has been a glimpse into the infinite abyss beloved of science fiction cinematographers.
The one where our hero turns a corner and teeters perilously as the corridor ends abruptly with one misstep ending in a bottomless void. The unprecedented £300 billion of support for the economy and the healthcare costs of the pandemic is by some estimates the equivalent of £4,000 for every man, woman and child in the UK Government debt is a problem deferred and after the price we have already asked young people to bear through this crisis, it would be wrong to leave them to shoulder the costs alone.
Central therefore to plans for recovery will need to be a strategy to return to a sustainable financial position and to reconcile that with our ambitions for better public services and a once-in-a-generation investment in infrastructure.
There is certainly more fuel in the tank on lower government spending. Whilst ‘pass the hat’ annual efficiency savings now yield diminishing returns, there is a sizable opportunity in the £290 billion the UK spends on public procurement every year and the Office for National Statistics highlights a continued public sector pay premium which the pandemic has only amplified.
But it is regrettably implausible that spending discipline alone will be sufficient to create a pathway to sustainable public finances. As every business leader knows – or finds out to their cost – you cannot cut your way to success.
The Campaign for Economic Growth which I chair believes fiscal responsibility is a fundamental foundation for economic growth. The optimal trajectory for the UK is the triptych of robust economic growth, a healthy tax base and smart spending decisions.
This year marks the fortieth anniversary of one of the most famous errors by ‘experts’: the letter by 364 economists to The Times objecting to Margaret Thatcher and her Chancellor increasing taxes in the midst of recession. The counsel against the tough decisions taken in the 1981 Budget could not have been more wrong. Cuts in tax rates followed later – and would be a powerful legacy of her governments – but not before dealing with an inherited Budget deficit.
The choices on raising tax are between tough and tougher. In making them we must first exhaust every alternative and then avoid the risk of choking off the precious growth by taxing the wrong places.
Increasing tax on the nation’s risk takers – whether hunting out the next life-saving vaccine, investing in clean growth technologies or breathing fresh life into our ageing housing stock – would run the risk of being counterproductive.
As a nation it may well be that we consume too much sugar, plastic or generate too much CO2 but there is no evidence that the UK is spawning too many entrepreneurs, creating too much new employment or attracting too much overseas investment.
Capital taxes such as CGT are a relative rounding error in terms of revenues raised but are a global smoke signal of our attitude towards those who create jobs and prosperity. Targeted reliefs for entrepreneurs and for those backing them are one of few aspects of our tax system to have been envied and emulated by our international competitors.
Better if necessary to seek to benefit from the downstream harvest of growth. Today the UK has the lowest Corporation Tax rate in the G7 after rapid cuts from 30% under Labour in 2007.
Increasing rates towards the one pound in every four of business profits rate last seen as recently as 2013, this would still see the UK be one of the most internationally competitive economies, particularly when accompanied by a modernisation of the R&D tax credits and the government’s ambitious investment in skills. Even better would be providing certainty to plan by laying out a glide path for multiple years so that businesses can plan.
More generally, as a business location the British economy is a highly attractive if not entirely unique prospect. We should have the confidence to not undersell ourselves. A stable, pro free-enterprise democracy with tariff free access to European markets, close links to the faster-growing Commonwealth countries and our native use of English as the universal language used by the fastest growing sectors and economies of the world. The opportunity is the stability of Switzerland combined with much of the dynamism of Singapore. Made a reality, this rare prospectus should not be at risk from a limited increase in taxes.
Once it is judged that demand could bear it, the government might additionally consider a temporary Covid-related uplift on VAT which has the virtue of spreading the burden across the broadest base whilst shielding those whose spending power has suffered.
Lower taxes can be a realistic future prospect fuelled by the faster growth forecast for the UK economy in the medium-term. But in that respect, hope is not a policy and a recovery plan without the tough choices necessary is no plan at all.
This article was originally published by The Telegraph
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