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The tax burden will rise anyway Samuel Brittan The Financial Times 18/03/05 My first reaction to Gordon Brown's ninth Budget was relief at the restraint exercised in a pre-election period. It is for all intents and purposes a neutral Budget. Modest reliefs are paid for by bringing forward North Sea oil tax payments and tax avoidance measures. My second reaction was that the chancellor was passionately sincere in his desire to establish a more prosperous and a more equitable society, both here and abroad. He has not lost, however, his disinclination to give any credit to his predecessors. If you look at the charts in his own Budget handbook it is pretty clear that the step jump towards stable economic performance took place after the UK left the Exchange Rate Mechanism in 1992. Although the independence of the Bank of England made a dent in inflationary expectations, inflation itself has been pretty stable for the last dozen years. So has growth. A big contribution to Britain's record comes from the floating exchange rate, which has given its economic policymakers a great advantage over the continental countries with which Mr Brown loves making comparisons. There is, however, a puzzle here. The exchange rate was first floated by Edward Heath in 1972. Why did it take 20 years for the Treasury to learn how to operate with such a rate? It will not do to blame the flirtation with shadowing the D-mark that began only in the late-1980s. Here, surely, is a subject for a doctorate. A more prosaic question is whether the chancellor will meet his first "golden rule" - that budget deficits should only pay for capital spending. There are arguments over the reclassification of road spending as capital expenditure and the official forecasts for economic growth, tax revenues and much else. The truth is that the current-capital distinction is slippery in the public sector. It does not matter much, except in terms of Mr Brown's own personal pride, whether this golden rule is breached or not. Behind it all is the primitive notion that capital spending is good, while current spending, for example, recruiting science teachers, is not so good. The chancellor is instinctively aware of this when he describes all public spending as "investment". A less bad yardstick is the second rule, the 40 per cent ceiling on the public sector debt ratio. There is no magic in any ratio but the higher it is the more future generations will have to pay in interest on the national debt and the more that credibility is stretched. The Institute for Fiscal Studies believes that this ratio will come under strain in later years. It advocates a tax rise or spending curb of £11bn a year, or 0.9 per cent of gross domestic product over the next cycle. Much public discussion is based on a confusion between tax rates and the tax burden. Even without any changes in tax rates, the tax to GDP ratio is expected by the Treasury to rise by 2 percentage points (or £24bn) as a proportion of GDP. The process is inelegantly called "fiscal drag". The Conservatives are not planning genuine tax cuts but slight reductions in the rate of increase of this ratio. Indeed, there is little to choose between the parties on economic policy. Michael Howard, the Tory leader, responded to Mr Brown with a bravura performance that would have brought the Oxford Union to its feet. But of an alternative political and economic vision to Labour's there was little sign. Charles Kennedy, the Liberal Democrat leader, effectively dismissed unattainable utopias "in which the sun shines 24 hours a day". But it was far too social democrat and not nearly liberal enough for my liking. He wants an increase in the top rate of income tax from 40 to 50 per cent to pay for his suggested reliefs. He could claim that it did so on the Treasury arithmetic. But such arithmetic is notoriously bad at estimating behavioural changes in response to tax moves. Moreover, the true Liberal suggestion should not be a local income tax, which simply bumps up marginal rates, but a land value tax, which Lloyd George was contemplating before world war one. Such a tax is the one truly radical idea which the Treasury and Number 10 are studying behind closed doors. My fear is that if this emerges it will be denounced on populist grounds by both opposition parties and the government will be forced into denial. Finally, the prime minister and chancellor are taking seriously the charges of over-regulation. But the issue is not one of detailed adjustments in particular regulations but the micro-management of the economy to which Mr Brown is so attached. To take one sample sentence from the Budget Book: "The chancellor has asked George Cox, chairman of the Design Council, to do his best to ensure that small and medium sized enterprises are able to provide creativity and innovation to improve their performance and productivity." Either your heart warms to this sort of thing or it does not. There are bigger issues on which to vote.
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