Monday, 20 February 2012

Growth Taxes

March’s budget is important. All budgets are important but this one is more important than usual. Why so?

Well in truth, this is the last budget that will deliver any tangible and demonstrable change during the lifetime of this Coalition with a General Election now fixed for May 2015. And, moreover, with UK plc stuck in economic neutral, this next budget desperately needs to stimulate some growth.

Question - So what can a Government do to stimulate growth?

Answer - Tax cuts.

Thus the debate around tax cuts is going to get louder and louder week by week. But within the Coalition’s economic plan to pay down our huge national deficit ASAP, is there any room for tax cuts? My guess is that there is. What Chancellor does not plan to leave himself room for some popular tax cuts in the run up to a General Election? So with no growth, maybe Boy George will have to deploy that little bit of slack he has up his sleeve earlier than he had planned. But, which taxes create growth?

The Lib Dems have nailed their colours to the mast: reduced personal tax allowances. They want to take anyone earning less than £10k out of the tax system funded by…you guessed it…taxing the rich more, mainly via their loony mansion tax. In the long term, this is a laudable aim - I suggested something similar way before the 2010 General Election - and of course in the short term, very populist. And it seems ‘fair’, which is the new lexicon. But, and here’s the problem, it will not stimulate growth. Because those for whom this makes the most difference - those on fixed low incomes, typically the economically challenged and the old - haven’t got much to spend.

Mr Yvette Cooper, desperate to suggest something populist to raise their sinking ship, has Labour calling for several possible different cuts: VAT down to 15%, or income tax down by 3%, all on a temporary basis, or the Lib Dem personal allowance option again. All unfunded. Just borrow more. To hell with it. Fuck the consequences. Think we’ve all experienced Mr Balls’ economic prowess before haven’t we? But, again, there’s a teency weency problem. None of them deliver growth, because the cautious just save more and the incautious just splurge their extra cash on ‘stuff’, and almost all ‘stuff’ is made abroad and imported. So we would mostly be stimulating China’s economy, not ours to any great extent.

So again, what tax cuts promote growth?

Well, there’s the problem. History has shown us again and again that it’s the tax cuts unpopular with the Left and painted by them as tax cuts for the rich that actually stimulate growth: corporation tax, CGT, and top rate income taxes. (Afternote - And the OECD agrees with me!)

Tricky one for the Boy George.

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