Wednesday, March 21, 2007

Budget 2007

Recently I confidently predicted that we would see nothing interesting coming out of the Budget. I extrapolated from the pre-budget report which played safe and did little of substance. Now, we have headline cuts in the basic rate of income tax and the main rate of corporation tax. The TaxPayers Alliance blog, in their initial reaction, called for "three cheers for the Chancellor" although they noted that devil is always in the detail with Brown budgets. I was wrong and something big has happened, has something good happened?

The first thing to note is that this just can't be as good as it looks. He's been given something of a stay of execution in public finance terms but there just isn't room in the budget for big giveaways unless spending is properly controlled or the dynamic implications of tax cuts given proper prominence. Room for tax cuts combined with a continuing rise, though slowed, in public spending is limited. This has resulted in what Philip Stevens, writing for the FT, calls a "Budget worthy of the Kremlin".

The headline cut in income tax is balanced by the abolition of the 10% rate. While this sort of flattening of the tax code is a good idea in general it needs to be, and usually is in flat tax proposals, balanced by a significant increase in the personal allowance to prevent the poor taking a kicking. This does not appear to have been done and the poor will take a kicking. More will be reliant upon tax credits with all the problems that brings.

The corporation tax measures are broadly sensible insofar as they reduce allowances and cut the main rate. This is a cautious version of the plan Osborne recently announced (the Conservative plan was for a 3% rather than 2% cut) and a good idea as it simplifies the tax system. However, this is combined with a rise in the rate on small business which is unfortunate. Plenty of vulnerable businesses will be waking up this morning facing a rise in tax they will struggle to afford.

One final item to note at this early stage is the tax avoidance legislation. "A loss accruing to a company is not an allowable loss if it arises as part of arrangements which have a tax advantage as their main purpose, or one of their main purposes". This is the kind of language which makes it unclear what is illegal and what is not. It forces companies to up their compliance budgets to ensure that they minimise legal risk. This has large costs throughout the economy which can be hard to spot in accounting terms.

An interesting sign of how the politics might play out comes from Neill Harvey-Smith who asks why socialist MPs are cheering the changes in income tax:

"David Cameron was supposed to be embarrassed by the surprise income tax announcement. But he wasn't. Gordon Brown clearly doesn't understand the difference between tactics and strategy. The battle of ideas was conceded in that smug moment. If the government can cut taxes and increase spending, then Labour's biggest stick for beating the Conservatives is broken. If Labour MPs cheer tax cuts for the rich at the expense of the poor, what is the point of the Labour party?"

In particular, this would seem to create an opportunity for quite a cohesive approach for the Conservative party attacking a Brown led Labour government. If Labour are rebalancing the tax system in favour of bigger business and richer people the Conservatives can campaign as champions of the 'little guy'. It would fit absolutely beautifully with a number of other Conservative policy priorities:

Conservative support for the Third Sector allows for little people to do their work caring for people without the frustrations of control by big government regulation. Conservative opposition to too many centralised targets allows for the little guy working in the public services to get on with his job without the big state bureaucracy on his back. It would even fit with the dismal rhetoric a while back about the risks of Tesco ruining small shops; big business crushing the little guy.

I'm still trying to come up with a term to define this approach but "Shopkeeper Conservatism" might do the trick and appeals to an old understanding of Britain emerging from Napoleon's attempt at an insult. A friend suggests "Conservatism of Little Platoons" but Iain Duncan Smith may already have claimed that one. A couple of people I've discussed this approach with have suggested the term "populism" which hints at its electoral appeal.


Communication consultant said...

Well, you should avoid "popular Conservatism" - cue "it's not popular, and it's not Conservatism". Surely Cameron's "liberal conservative" label captures this best. Some people assume liberalism is all about gay rights but the concerns of Adam Smith - the benefits of markets, resistance to monopoly, his principles of taxation - animate just the ideas you discuss. Now the Tories are free to pursue a tax-cutting agenda, victory is a big step closer.

James Higham said...

I just posted on this:

However, this is combined with a rise in the rate on small business which is unfortunate.

It's appalling.

Anonymous said...

The 2p cuts in income tax and corporation tax is to be welcomed but the fact it's funded by the doubling of the lower income tax rate from 10p to 20p, and increasing the lower rate of corporation tax, is worse than unfortunate, it's disgusting. There's a huge opportunity here for the Conservatives.