The Chancellor’s first major decision that will set the tone and scope for the rest of the Budget has to be about the structure of the tax system. This needs to be taken with the long-term goals of economic stability, fairness and administrative efficiency in mind rather than being subject to short-term pressures from highly vocal lobby groups. Corporation tax is a prime example of this. Business groups such as the CBI are calling for a cut in the headline rate of corporation tax because the UK has failed to match recent cuts made by countries like Italy and the Netherlands, but this risks encouraging a beggar-my-neighbour Dutch auction on tax with the end result that corporation tax would eventually be cut to zero. The Chancellor will also have to reveal his final thoughts on non-domiciles and Capital Gains Tax after the heated consultations that have taken place on these issues in recent months. What he does here will signal the direction of travel for the rest of the Budget.
We have already heard that this will be the ‘Green Budget’. The Chancellor needs to use “green taxes” more effectively to achieve key environmental goals – in particular so the UK can reach its long-term goal of a 60% reduction in greenhouse gas emissions by 2050. But he is already being accused of using these ‘green taxes’ as stealth taxes, accusations he should ignore. There are several measures which should be considered in this category. High fuel prices have prompted calls from motoring and road haulage lobby groups to delay the introduction of the pre-announced 2p increase in petrol duty until 2009, but continued increases in fuel duty are an essential part of an effective green tax package. The sliding scale of Vehicle Excise Duty should be strengthened, with higher taxes for ‘gas-guzzling’ cars. And there should be more financial incentives for households and businesses to use low-carbon energy sources such as renewables to supply their energy needs, and to use energy more efficiently.
But there is one area where Alistair Darling can make a real impact on Wednesday afternoon, which is to re-establish the commitment to eliminating child poverty by 2020. This is more than a simple target. It is a touchstone issue that goes to the heart of Labour’s progressive soul. Recent ippr research shows that although the number of children in poverty in the UK has fallen by 600,000 over the last ten years, there are still 1.4 million poor children in households where at least one parent works – the same as in 1997. Half of all children in poverty now live in a working household. An increase in the value of the Working Tax Credit for couple families to reflect the fact that couple families need more income to lift them out of poverty than lone parent households would help lift 200,000 children out of poverty. Increasing the child element of the Child Tax Credit by a further £8 a week would help target resources on the poorest families. And individualising the Working Tax Credit threshold so that each adult in an eligible family can earn up to £100 a week before their entitlement to tax credits starts to be withdrawn would make it more worthwhile both parents taking up employment. To help pay for these measures, the Chancellor could release £1.2 billion by removing entitlement to Child Tax Credit from higher income families.
All Budgets have winners and losers but this time round there are likely to be more of the latter. And for Alistair Darling the choice is simple: will the small number of winners come from the top or the bottom?
Howard Reed is Chief Economist of ippr