David Laws is right. Britain needs to cut spending more for simpler, lower taxes

June 25, 2012 5:02 PM

The Government should cut spending and tax further than current plans, David Laws has said in a chapter for a new Institute for Economic Affairs book on the Liberal Democrats’ approach to public spending and economics. Echoing the conclusions of the 2020 Tax Commission’s Single Income Tax, the Yeovil MP stressed the need for simplifying taxes and reducing spending to make possible significantly lower tax rates:
Future UK governments should consider a further substantial real rise in the personal tax allowance, along with lower marginal rates of tax at all income levels. This can be paid for over time by continuing to reduce the share of public spending in GDP, and by reforming and simplifying the tax system to reduce avoidance opportunities and to scale back allowances and reliefs which often give excess benefits to those on higher income levels. Corporate tax rates also need to be competitive, while bearing down on avoidance.

Laws stressed that spending reductions should be targeted to avoid the public’s priority areas of health, education and pensions. In an interview with the Sunday Telegraph, he said that the share of national income spent by government should fall to 35 per cent, a very similar level to 33 per cent recommended by the 2020 Tax Commission.

It’s clear that a growing consensus is emerging on the need for a less onerous tax burden to free up the economy to deliver the growth and prosperity we need. And it’s also clear that a growing number of commentators accept that significant simplification has to play a key role in lowering tax rates for everyone. Laws also set out the liberal case for cuts, referring to historical figures in the Liberal party and highlighting the relationship between high government spending and sluggish economic growth.
But even after the existing fiscal consolidation, state spending will account for some 40% of GDP, a figure that would have shocked not only Adam Smith, Gladstone and J.S. Mill, but also Keynes and Lloyd George. The implication of the state spending 40% of national income is that there is likely to be too much resource misallocation and too much waste and inefficiency. The liberal ambition should be for long-term total public spending growth to be restrained at below the trend rate of growth of the economy – this probably means decent real growth of health, education and pensions spending, offset by most other areas of public spending shrinking over time as a share of GDP. This objective will be made easier to deliver if we can create the conditions for faster economic growth and for lower levels of worklessness amongst the population of working age.

David Laws’ important intervention shows how the Single Income Tax can provide the basis for tax reform in a well-thought through Liberal Democrat agenda. A greater private and voluntary sector with faster economic growth. Lower tax rates and a substantially higher personal allowance. Fairer, simpler, transparent taxes without exemptions and reliefs. These are objectives that ought to appeal to serious-minded reformers across the political spectrum.The Government should cut spending and tax further than current plans, David Laws has said in a chapter for a new Institute for Economic Affairs book on the Liberal Democrats’ approach to public spending and economics. Echoing the conclusions of the 2020 Tax Commission’s Single Income Tax, the Yeovil MP stressed the need for simplifying taxes and reducing spending to make possible significantly lower tax rates:
Future UK governments should consider a further substantial real rise in the personal tax allowance, along with lower marginal rates of tax at all income levels. This can be paid for over time by continuing to reduce the share of public spending in GDP, and by reforming and simplifying the tax system to reduce avoidance opportunities and to scale back allowances and reliefs which often give excess benefits to those on higher income levels. Corporate tax rates also need to be competitive, while bearing down on avoidance.

Laws stressed that spending reductions should be targeted to avoid the public’s priority areas of health, education and pensions. In an interview with the Sunday Telegraph, he said that the share of national income spent by government should fall to 35 per cent, a very similar level to 33 per cent recommended by the 2020 Tax Commission.

It’s clear that a growing consensus is emerging on the need for a less onerous tax burden to free up the economy to deliver the growth and prosperity we need. And it’s also clear that a growing number of commentators accept that significant simplification has to play a key role in lowering tax rates for everyone. Laws also set out the liberal case for cuts, referring to historical figures in the Liberal party and highlighting the relationship between high government spending and sluggish economic growth.
But even after the existing fiscal consolidation, state spending will account for some 40% of GDP, a figure that would have shocked not only Adam Smith, Gladstone and J.S. Mill, but also Keynes and Lloyd George. The implication of the state spending 40% of national income is that there is likely to be too much resource misallocation and too much waste and inefficiency. The liberal ambition should be for long-term total public spending growth to be restrained at below the trend rate of growth of the economy – this probably means decent real growth of health, education and pensions spending, offset by most other areas of public spending shrinking over time as a share of GDP. This objective will be made easier to deliver if we can create the conditions for faster economic growth and for lower levels of worklessness amongst the population of working age.

David Laws’ important intervention shows how the Single Income Tax can provide the basis for tax reform in a well-thought through Liberal Democrat agenda. A greater private and voluntary sector with faster economic growth. Lower tax rates and a substantially higher personal allowance. Fairer, simpler, transparent taxes without exemptions and reliefs. These are objectives that ought to appeal to serious-minded reformers across the political spectrum.

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