Budget 2008: Taxing issues

Budget 2008: Taxing issues
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The discussion around Alistair Darling’s first Budget is likely to be dominated by immediate worries, such as non-dom taxation, capital gains tax, the rising budget deficit, Northern Rock, and the impact of the credit crunch on economic growth.  These are all issues of paramount concern.  But it’s important not to forget the negative longer-term effects of fiscal policy in recent years.

Public spending has surged since 2000.  On the OECD numbers, it has increased from 37.5 per cent of GDP in 2000 to 45 per cent last year – an increase unprecedented during a peacetime period of steady economic growth.  In 2000, Britain’s public spending as a share of national income was below the OECD average.  It is now 4.5 percentage points higher. 

This “flash flood” of government spending, to use Reform’s illuminating phrase, has failed to deliver anything like commensurate results.  To take three examples:

Firstly, spending on healthcare has risen in real terms (2005-06 prices) from £57.3 billion in 1999-00 to £92.8 billion in 2006-07.  But our recent study Wasting Lives: A statistical analysis of NHS performance in a European context since 1981, found that poor NHS performance was resulting in 17,000 deaths per year.  Mortality amenable to healthcare was 26.9 per cent higher in the UK than in comparable European countries. 

The study also found that Gordon Brown’s additional spending since 1999, despite significantly outpacing spending growth in comparable European countries, has made no discernable difference to the pattern of improving mortality amenable to healthcare.

Secondly, spending on education has risen in real terms from £47 billion in 1999-00 to £69.8 billion in 2006-07.  During that time the UK has fallen down international rankings of educational performance.  British educational performance ranked far higher in the 2000 edition of the respected OECD PISA international comparison of educational standards than it did in the 2006 survey.  In scientific literacy Britain fell from 4th to 14th; in mathematical literacy from 8th to 24th and in reading literacy from 7th to 17th.

Thirdly, real terms spending on law and order has risen from £20.9 billion in 1998-99 to £29.8 billion in 2006-07.  Despite this recorded crime rose by 6 per cent over that period.  Detection rates fell from 29 per cent to 26 per cent.  Two-year prison reconviction rates rose from 58 per cent in 1995 to 65 per cent in 2004 (the most recent data available).

This failure to secure value for money suggests that public service reform will yield better results than crude increases in resources.  Putting it mildly, state spending should be restrained in order to prevent further waste.  But it is also becoming increasingly clear that controlling spending and cutting taxes will bring significant economic benefits over the medium to long term.  This can be seen in a number of ways:

Firstly, the TPA’s Budget report details a number of academic studies which suggest that economies with a smaller share of GDP consumed by government will grow faster.  The effect on growth is large enough that spending increases since 2000 might already be costing us around £12 billion a year in lost GDP.

Secondly, the Treasury has consistently overestimated tax revenues as tax rises failed to generate as much revenue as expected under a static analysis.  Recent tax rises have had significant negative dynamic effects.

Thirdly, a dynamic model produced for the TaxPayers’ Alliance by the Centre for Economics and Business Research has shown that pre-announced, phased cuts in corporation tax could lead to major increases in economic growth, employment, disposable income, and, over time, tax revenue.

It goes without saying that the TPA would like to see radical reductions in taxation and politicians removed from the management of public services, but we can suggest two politically ‘easy wins’ that could and should be carried out immediately.

Firstly, the planned 2p rise in Fuel Duty in April should be scrapped, which would be a politically astute move.  Official data suggests that the population of the most marginal 100 Westminster constituencies in England and Wales are almost 7 per cent more likely to drive to work than those in the least marginal 100 constituencies and travel 13 per cent further to work, while people on middle incomes, often swing voters, spend the most on petrol as a share of their earnings.  YouGov polling commissioned by the TaxPayers’ Alliance has also found that 60 per cent of the public consider Fuel Duty unfair against just 17 per cent who think it fair.

Secondly, reducing the size of the state in the medium term will need a number of policies designed to curb the growth in public spending.  One of those would be to reduce the size of the Civil Service in a painless (and, compared to the Gershon process, more effective) way.  Almost a quarter of the Civil Service will retire in the next ten years.  If none of these positions were rehired, taxpayers could eventually save £3.3 billion a year in salary, employer NI and pension costs.  A similar policy has been adopted by Nicholas Sarkozy in France.  It should not be too difficult to follow suit in Britain.

Both Alistair Darling and George Osborne should be moving in this direction to make a start at reversing the damage from the fiscal ‘flash flood’ of the past decade.

Matthew Elliott is Chief Executive of the TaxPayers’ Alliance [TPA].  Corin Taylor is the TPA’s Research Director.