Encouraging words from the Conservatives on tax

Several papers report comments made by Shadow Chancellor George Osborne. He said:

"I will approach each Budget thinking how I can reduce
taxes; how can I prepare Britain's economy to compete with China in the
world economy. Lower taxes are good for people
and the economy. Next year I hope to set out plans for business
taxation so that Britain is competitive...

"My ambition is lower taxes. I would like to be the Chancellor that under-promises and over-delivers."

Quite right. It's encouraging to hear positive words about reducing tax from the Shadow Chancellor. George Osborne's inheritance tax announcement in October was so well received by voters, that further tax announcements will be extremely popular, not to mention being the right thing for the economy and hard-pressed families and businesses.


There are three further points to make:


1. We don't yet know whether George Osborne is talking about reductions in the overall burden of tax (real tax cuts), or revenue-neutral simplifications that will allow headline rates to be reduced.


There is nothing wrong with a business tax simplification that removes allowances and exemptions and reduces the headline rate of corporation tax. It is quite likely that Mr Osborne will propose to align accounting profit with taxable profit for corporations, which will simplify the tax regime and allow a revenue-neutral 3p cut in the main corporation tax rate - this option was proposed by the Tax Reform Commission (although the Commission recommended a 5p cut in the main corporation tax rate) and PWC have been commissioned to produce a technical implementation plan.


But there are problems with simplifications that don't reduce the overall burden of tax, as Alistair Darling discovered a couple of months ago. The losers will shout more loudly than the winners. To make simplification work, you have to reduce the overall tax burden.


Similarly, reductions in personal taxes that are offset by higher green taxes are unlikely to prove popular. Green taxes already more than cover the cost of Britain's carbon footprint and, in an August YouGov poll, 63 per cent of the public said that "politicians are not serious about the environment and are using the issue as an excuse to raise more revenue from green taxes".


2. There really is no getting away from the fact that how much tax people and businesses are paying  overall is what counts. The public are likely to see through attempts to give with one hand and take away with the other - witness the reaction to Gordon Brown's Budget in March, which did precisely that.


It is true that Mr Osborne's inheritance tax announcement in October was, at least on paper, revenue-neutral overall. But of course for voters in a general election, who are not non-doms, it wasn't - hence its popularity. It would have been a different story had the Shadow Chancellor said that inheritance tax would be abolished for almost all estates but that, to maintain economic stability, taxes on cars and flights for ordinary people would go up.


The inheritance tax announcement was a genuine masterstroke. But there are few revenue-neutral tax changes that will have the same positive political impact. Green taxes are unlikely to be one of them - let us not forget that the Conservative Party's pre-conference slump in the polls came after the Gummer-Goldsmith report, which recommended higher green taxes, including a possible tax on supermarket car parking.


There is a genuine political space for the Conservatives to move into if they choose. A YouGov poll in August asked the question: "Thinking about the present levels of tax on the one hand and the state of the public services (like health or education) on the other, do you think the party you support should pledge to increase taxes, hold taxes at their present level or to reduce taxes?" The results were: increase taxes - 6 per cent; hold at present level - 38 per cent; reduce taxes - 44 per cent; don't know - 12 per cent.


3. The crucial factor in whether the Conservatives can either offer reductions in the overall burden of tax or revenue-neutral tax changes is how much the Party will spend. We know all this already but it's worth repeating: George Osborne has made it clear that he will not borrow to fund tax reductions, nor will he rely on dynamic forecasting. Therefore, the only way that he can reduce the overall burden of tax is to increase public spending more slowly than economic growth.


The plans of both the Conservatives and the Government are to increase spending by 2 per cent per annum in real terms for the next three years. With economic growth at 2.5 per cent to 3 per cent, this would clearly allow small reductions in the overall burden of tax. 0.5 per cent of government spending is around £3 billion - or close to a 1p reduction in the basic rate of income tax per year, with no need for tax increases elsewhere.


It now looks, however, that economic growth will be significantly lower for the immediate future. Growth is likely to be below 2 per cent in 2008, while yesterday Dresdner Kleinwort put the chances of a recession next year at 50-50. In these cirmumctances, increasing public spending at 2 per cent in real terms is likely to mean higher taxes or higher borrowing.


Given that an election is unlikely before 2009 or even 2010, this will be Labour's problem, rather than a Tory headache. But that's not the end of the story. For there is nothing stopping Gordon Brown/Alistair Darling from publishing the Comprehensive Spending Review, for the following three years, before an election. The Government could easily make the public spending settlement more generous, say, 3 per cent a year in real terms, and dare the Tories to undercut them. If the Tories pledge to match the Government, then no cuts in the overall burden of tax for almost the whole of a first Tory Parliament. If the Tories don't, then Brown can fight the election on "investment vs cuts" all over again.


If the Conservatives don't make the argument now for tighter public spending and reductions in the overall burden of tax, they risk falling victim to precisely this sort of scenario. But here again, there is good news. A YouGov poll in August posed the question: "The money the government spends on public services and other things comes mainly from taxation. Do you think..." and the responses were: "The government spends too much and therefore taxes us too much" - 64 per cent; "The government has got the balance about right" - 18 per cent; "The government spends too little and therefore taxes us too little" - 4 per cent; "Don't know" - 14 per cent. YouGov asked the same question in March 2005 and the responses were 49 per cent, 25 per cent, 11 per cent and 15 per cent, respectively. Voters are therefore more ready than ever for a party to make the case for spending restraint and reductions in the overall burden of tax.

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