For the past couple of months, government business has been bogged down in the detail of taxation policy. Higher personal tax allowances, a lower top rate, more stamp duty for £2 million mansions, a tycoon tax — all have been batted across the coalition ping-pong table at dizzying speed. While engaged in this game the government has refused to consider the other side of its ledger: the spending side. This is seen as a great untouchable, thus considerably reducing George Osborne’s room for manoeuvre. This is why this was a Budget that laid the foundations for an economic recovery, rather than starting one in itself.
The tax cuts which the Chancellor did make were welcome, as far as they went. Raising the tax threshold, and giving relief to the low-paid was a timely and effective gesture. It would be churlish for any Conservative not to thank the Liberal Democrats for their pressure in ensuring this policy was implemented. The Tory leadership has had a mild allergy to income tax cuts for years: it took Nick Clegg and Danny Alexander to argue to cut the burden. This ought to have been financed by extra savings found in state spending, not yet another tax on property and pensioners.
George Osborne claimed this was the largest single tax cut for years. This, alas, is not saying much. We are just recovering from an audacious expansion of the government machine in Britain, the scale of which is still not properly understood. Over the course of the last decade, state spending surged from 37 per cent of economic output to 51 per cent. No other country has staged such an expansion of government, with the exception of those preparing for war. The Chancellor and the country are still straining under the burden of a government that has grown out of all proportion to its usefulness. The surest way to recovery is to shrink the size of the state.
The government is making savings, but at the smallest possible pace — just under 1 per cent a year, according to this week’s Budget. Everything in the Budget is deemed up for grabs, apart from spending reform. This is why, to pay for the tax cuts, we are having the new stamp duty. Britain already has the highest property taxes in the developed world. They have just become higher. And while cracking down on tax avoidance is welcome, it ought to be an everyday task of government. New loopholes are sure to open as fast as others are closed.
In all, this was a tax-cutting Budget — but the total £2 billion figure is about 0.5 per cent of state spending. This is a rounding error. As the Chancellor says, ‘stability comes first’ — and Britain has now been put on downgrade watch by two credit rating agencies, mindful that Osborne plans to increase debt from £1 trillion to £1.4 trillion by 2015 — higher even than Labour’s plan at the last election. Osborne’s old mantra was ‘stability before tax cuts’. As the headwinds gather strength, he might now start to ask if state spending is the greatest enemy for stability.
Perhaps the most encouraging part of the Budget package was the decision to start sending statements to households, spelling out what the government is doing with their money. This can slowly start to change the terms of debate, drawing attention to waste — and scope for savings. Ditto the decision to introduce to the Budget the Laffer curve, and the basic truth that higher yields can arise from lower rates. The Treasury assumes the rich (and their money) are no more mobile than they were in 1988. Such an assumption was needed to justify the political decision to keep the top rate of tax at 45p next year.
A mechanism is now in place to reduce the top rate of tax, hopefully towards the more likely tax-maximising rate of 38p. Osborne can even present this as a technical issue, as the Treasury gathers more data and works out that in our globalised world, the rich and their money have never been more mobile. As he said in the Budget, there is no point in a tax which repels entrepreneurs and raises almost no money. This begs the question about why he is waiting until April 2013 to abolish it. But some progress is better than none.
But the greatest task is to make the case for a smaller state. That is where Budget battles can be won and lost: cutting out waste and discretionary expenditure at every level. The government does not have a monopoly of waste: every household and every business is spending money which, when they are minded to examine it, is unnecessary. The difference is that the government seems perpetually less willing to face up to waste. If we are to enjoy the economic boost which permanently lower taxes would bring the coalition, will have to rediscover its zeal for sound public finances by far more ambitious cuts.
This article first appeared in the print edition of The Spectator magazine, dated March 24, 2012