Stunningly incompetent budget – wrong sort of tax cuts
by Henry Law
This article is the personal opinion of the author and does not reflect the views of the Campaign, which is strictly non-party
Last week′s budget is a display of stunning incompetence. The wisdom of a cut in the overall tax take is debatable, but of the particular tax cuts proposed by the Chancellor, there is nothing favourable to be said. The cut in Stamp Duty, whilst desirable in itself, will help to propel the economy into a land price boom, towards the inevitable bust, probably in 2026. It was reckless to cut Stamp Duty without at the same time implementing the long overdue reform of the mess that is UK property taxation.
Even accepting that there should have been cuts in income tax, these cuts are plain dumb, and on a par with the pointless 10% starting rate of income tax introduced by Gordon Brown in 1999. With the aim of cutting taxes in view, Kwarteng could just have increased Personal Allowances, which would have retained the simplicity of a 20% tax rate and taken low-end workers out of tax altogether. Any benefits from the cut in top rate income tax could equally well have been achieved by changing the higher rate theshold figure. Considered in isolation, this latter change is not entirely without merit, as it will reduce the cost to business of hiring top-level managers. It puts the UK at an advantage compared to countries like Sweden, which have swingeing rates of tax on the higher paid, and have suffered a brain drain to the US and UK as a result. However, it sends out a bad signal to the people on whom the Conservatives must rely if they are to be re-elected. With support for the Conservatives already on a knife edge for failing to address a raft of problems, this has probably tipped the balance and handed the next government to Labour.
This budget will do next to nothing to promote economic recovery. The Chancellor’s blind faith in ignoring the budget deficit in the hope that the tax cuts will deliver growth is reminiscent of the “Dash for Growth” which was the policy followed by the Heath government at the start of the 1970s, put into effect by the then Chancellor, Anthony Barber, with whom comparison is now being made. As a historian with a first class honours from Cambridge University, with academic distinctions on top, one might have expected Kwarteng to have known about that; how it ended in double-digit inflation, a decade of industrial unrest ending in the Winter of Discontent, the near-demise of British industry, a bail-out from the IMF and the implementation of monetarist policies following the election of the Thatcher government – which led to a repeat of the cycle ending in the crash of 1992.
Sadly, the Chancellor failed to implement the one measure which would have done more than any other to kick start the economy – the scrapping of VAT, with immediate effect, accompanied by the relatively small increases in some other taxes to make up any shortfall. VAT at 20% results in a deadweight loss to the economy of at least 5%, which abolition of the tax would have released.
All in all, this budget must be judged a failure and a missed opportunity. It will also lead to serious problems in a year or two. They will be painful to fix. With a larger population then fifty years ago, a more divided society, and no North Sea oil to help the finances, this budget has set Britain on a path towards crisis. It will not be a Conservative government which will have to deal with it.