Corporate tax bleak news means Cameron & Osborne have little choice but to cut spending and cut taxes

Public sector finances figures released yesterday show borrowing of £600 million in July, compared to a surplus of £2.8 billion last year. The Office for National Statistics release also shows how borrowing over the four months from April to July has deteriorated from £35.6 billion this year to £44.9 billion in 2011.

The bleak numbers have been led by a collapse in Corporation Tax receipts.  Cash receipts in July for the tax on company profits are down 20 per cent compared to last year, while receipts during April to July were down 11 per cent. Despite this, spending has continued to rise. In July, central Government accrued current expenditure rose by 5.1 per cent compared to last year to £50.2 billion and by 3.5 per cent to £212.5 billion over the four-month period.

The outlook for the Government’s finances remains perilous. The Office for Budget Responsibility predicts public sector net borrowing to moderate marginally to £119.9 billion this year, from £125 billion in 2011-12. And as the Government’s overspending continues apace, the mountain of debt continues to rocket ever higher.

Official public sector debt, which ignores liabilities tied up in private finance initiative schemes as well as vast unfunded public sector pensions and state pensions, has swelled from £940 billion at the end of July last year to £1,032 billion this year. By the end of the 2012-13 financial year, it is predicted to shoot up to £1,159 billion, equivalent to £44,500 for every household in Britain.

Coalition plans to eliminate the deficit by 2015 have been blown far off course but Opposition claims that sluggish economic growth and a stubbornly high deficit are caused by the Government’s modest reduction in the growth of spending are little better than delusional. The facts are starkly different. While the economy’s chronic lifelessness has many causes including the Eurozone crisis, burdensome business regulation and a highly constrictive land use planning system, one disease stands out for its obvious and devastating impact: fiscal gluttony.

Steady but prolonged and reckless spending growth over the decade since 1999 not only caused the Government to be in a position where it had to finance some its expenditure with borrowing even at the height of a long boom. It also meant that employees, offices and finance was consumed by the low-growth, low-productivity public sector where innovation and efficiency improvements are rarer than in the private sector where sharper competition and a greater degree of personal incentive spurs organisations toward greater efficiency and economic growth.

But there was another malignant effect of that gluttonous spending binge during the so-called ‘Noughties’. The Government had to drain ever more money out of the economy to pay for its binge and so taxes became ever more onerous. While the headline rate of Income Tax fell to 20 per cent, more and more people were dragged into the higher 40 per cent rate and a new 50 per cent rate was introduced. Beyond this, a plethora of other less noticeable taxes were sneakily raised such as Air Passenger Duty, Landfill Tax and National Insurance. The result is one of the world’s most complex tax systems that punishes work and enterprise but yet cannot hope to raise the amount of revenue demanded by those who have grown used to the lavish spending that seemed normal before the financial crisis.

Far from cutting spending “too far, too fast”, the Government’s approach to public finances could be better characterised as “keep spending and tax rates high and hope tax revenues rise” . But high tax rates and complex rules are smothering the incentives for people to forge new businesses, expand and create new jobs. High spending, meanwhile, is sucking up resources and keeping them from being more productively employed in the private sector. Families and businesses desperately need tax cuts to help them grow and prosper. But substantial tax cuts simply aren’t affordable while the Government is overspending as heavily as it is now.

Cutting the rate of growth in spending is not enough. The level of spending itself must be cut, too. Instead of July public spending being 5 per cent higher than last year, it should have been 5 per cent lower, at least. The money saved could have been used to cut and simplify taxes such as National Insurance, Corporation Tax and Fuel Duty, as we set out in the final report of the 2020 Tax Commission. Fraser Nelson superbly highlights the point in his Spectator Coffee House blog:

Before the election, David Cameron rightly said that you can’t borrow your way out of a debt crisis. In office, he is proving it.

The economic growth that Mr Cameron and his Chancellor are praying for won’t just materialise all by itself. They have to take the tough decisions to cut spending and cut taxes, first.

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