The Good Samaritan did not just have good intentions – he also had money

It’s time for the Chancellor to make the case for capitalism, and recognise that as Margaret Thatcher outlined, the Good Samaritan did not just have good intentions – he also had money

Tax cuts back on the agenda, Mr. Osborne?
Ryan Bourne
On 14 March 2012 12:16

For months, the Chancellor has effectively spun the line that there is no money available for tax cuts. When he gave the Autumn Statement in November, the few of us who suggested rebalancing within the deficit reduction framework were dismissed as being ‘unrealistic’. The scope for re-examining the forecast £714.5 billion expenditure this year was out of the question.

Now the mood seems to have changed. Suddenly, tax cuts are on the agenda again. Yes, deficit reduction is still essential but most have begun to recognise that so far the early closure of it has been over-reliant on raising the tax burden and cancelling capital projects. Just 6 percent of the planned contribution of current expenditure cuts to deficit closure has been implemented.

It’s fair to say the Lib Dems have stolen a march in the tax debate. But while their call for lower personal taxes, through a rise in the income tax personal allowance, is welcome, their left-wing redistributive instincts appear uncontrollable. First, we had the mansion tax; then a tycoon tax. What next, a Bentley tax?

The anti-wealth and anti-rich Budget briefing and counter-briefing will have done nothing to enhance business confidence as the economy continues to falter. We do not need new taxes. But the Lib Dems domination of the debate so far provides the Conservatives with an opportunity to carve out a distinct Budget pitch which recognises that long-term recovery will only arrive when private sector enterprise is enabled to flourish.

Over the past two weeks, Tim Montgomerie has made a compelling case for tax cuts for low income workers. We agree with him that the need for deficit reduction means any tax cuts should be ‘funded’ initially by additional cuts to expenditure on areas which do not enhance our medium-term growth prospects.

Where we depart from his demands is that we would not like new or extended taxes to facilitate purely redistributive measures, which some want on the Keynesian basis that it will ‘stimulate’ the economy through more consumption by the poorer in our society. Indeed, if the Government is serious about moving to an economy based on savings and investment, then it is difficult to see a more perverse way of indicating your desire than by confiscating wealth.

Instead, the aims of the Budget should be three-fold: to enhance the UK’s economic competitiveness; to cut the costs associated with job creation; and, where possible, to ease the pressure on working families. 

The first two necessitate an on-going supply-side agenda, including planning reforms, deregulation, examination of employment law, and reform of childcare. But the crucial feature is that it requires a lower tax burden on business and wealth creators.

In light of this, the Centre for Policy Studies has this week brought together the ideas that we’ve been working on over the past two years into a policy note: 21 policies for growth and wealth creation. It incorporates targeted tax cuts, employment deregulation, delay of the carbon price floor and a re-examination of the effectiveness of tax relief on pensions.

All of the policies involved are an attempt to improve the underlying growth rate of the UK. The aim is to make use of around £15 billion worth of savings from spending that does not enhance growth (means-testing of old age benefits, trimming the aid Budget and reforms to pension tax relief), and use the bulk of the proceeds to fund tax cuts on business and job creators:

- An immediate cut in the main rate of Corporation Tax to 20 percent

- A 1 percent cut in the main rate of employers’ NICs

- Two year holidays from NICs for very small firms on the next four workers they employ

- Abolition of the 50 percent tax rate

These would cost between £8 billion and £10 billion in 2012-13 according to HMRC. But there is reason to suspect that some might even pay for themselves. The main rate of Corporation Tax, for example, has fallen from 52 percent to 26 percent since 1983, but the revenue as a proportion of GDP has increased from 2.0 percent to 2.6 percent.

We also think, like Tim, that the Chancellor could ramp up the push towards raising the personal allowance to £10,000 over the next two years. In fact, the CPS was the very first organisation to advocate this policy, as far back as 2001! Raising the personal allowance to £9,000 this year would put another £380 in most workers’ pockets, over and above the planned increase to £8105 – costing a total of £4.4 billion.

These modest measures, alongside the reforms to employment legislation advocated by Dominic Raab and the delay of the carbon price floor, would begin to show that the Government was on the side of business, despite all the recent rhetoric. As former Tesco boss Sir Terry Leahy highlighted yesterday: "Very noble social objectives, welfare, health and education, can only be met if the economy is successful and there are wealth creators.”

The doomsday edition of Newsnight yesterday evening showed the challenges our country faces in providing public services into the future. It’s time for the Chancellor to make the case for capitalism, and recognise that as Margaret Thatcher outlined, the Good Samaritan did not just have good intentions – he also had money. 

Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies. He tweets at @RyanCPS

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