Economic nonsense from the Chancellor

The tax reduction for small businesses would affect 90,000 warehouses, 60,000 offices, and over 100,000 shops. This, along with measures announced earlier this year to help small businesses bid for public sector contracts, would, the Chancellor claimed, support growth in the downturn.

The cut in stamp duty is intended to give extra support to first-time buyers to help them get on the property ladder.

Economic nonsense

It should be self-evident that exempting vacant business property from business rates can only help to prolong recession by encouraging landlords to hold out for unrealistically high rents, whilst rates exemptions and reductions end up in landlords’ pockets as rentals reflect the lower property tax liability. This could have been predicted theoretically through the application of Ricardo’s Law of Rent, but there is ample evidence from the recent past. Before the introduction of the Uniform Business Rate in 1990, rates differed across local authority boundaries. Studies showed that where rates were high, rents were low, and vice versa, the difference being the difference in the rates payable.

Total occupation costs are what count

This was exactly what would be expected, since total occupation costs for similar properties tend to level out. When rents are high, the tenants are paying to the landlord instead of to the local authority, and the money ends up in private hands instead of being used to pay for public services. The most striking example of the phenomenon occurred in the Enterprise Zones, a gimmick devised by the Conservative government in the 1980s, where business premises were subject to a “rates holiday”. Surveys showed that rents in the Zones were higher than immediately outside by precisely the amount of the rates that did not have to be paid.

The stamp duty exemption will work in much the same way. It will simply push up house prices. People have a fixed amount to spend and if they do not have to find stamp duty out of their limited funds then they will pay more for their houses instead. Although we disagree with taxes on the sale of land, abolishing them will not help anyone get on the so-called “housing ladder”. And whilst on the subject, it is a pity that the Chancellor never seems to have asked himself why there is a “housing ladder” that young people must struggle to climb on to.

The one thing he should have done

Even within the limits of the present paradigm, there are things that the Chancellor could have usefully done, but failed to. Instead of cooking up a complicated package of grants and incentives for this, that, and the other, he might have raised tax thresholds. It is nonsense that someone earning the national minimum wage should be paying tax, and a reasonable threshold would be based on working a 40-hour week at the statutory minimum (about £10,000 per annum) even if this meant raising the standard rate of tax. It would have the immediate effect of reducing the minimum cost of labour and so would tend to draw people off the dole and into work. But that would have been too simple. Politicians and civil servants adore complexity.

Once more, then, we see the unedifying spectacle of a British Chancellor parading his economic illiteracy.