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BUTLER EAMONNDr Eamonn Butler is Director of the Adam Smith Institute. Follow Eamonn on Twitter.

The
reason that Moody’s gave for downgrading the UK’s AAA status is that, although
the Chancellor remains committed to sound public finances, there is precious
little economic growth around to help him.

Quite simply, when you, or I or a government are deeply in debt, only two
honest choices are available to us. We have to earn more or spend less.

Before this government was formed, many of us argued that there needed to be
real and significant savings – what the BBC would call ‘deep cuts’ – in public
expenditure. It would mean closing whole programmes, maybe even whole
department, and focusing expenditure on only the top priorities.

But while politicians are very good at spending more, spending less does not
come naturally to them. George Osborne figured that he could leave spending
more or less unchanged, and that growth would rebalance the economy, leaving
the state sector as a smaller, more affordable proportion of the whole. But
that just hasn’t happened. Our customers in the US and EU are suffering,
customers and businesses at home are sitting on their hands to see what
happens, and people just aren’t making investments for the future.


We don’t need another spending splurge – that’s what got us into this mess. But
we do need a growth agenda, and we need it now. We need to reduce the risks
that are making people reluctant to invest. The key to that is to reduce
workplace regulations and the taxes on business. The first, as Steve Hilton
found, can be a tough job, given how many regulations come from the EU. But the
second, we can do.

Apart from Vince Cable’s anti-business rhetoric (which hardly inspires
confidence among employers), two of the stupidest moves by this coalition
government were on the tax front: keeping their predecessor’s 50p tax (just
timidly slicing just 5p off it) and raising capital gains tax on most things to
28%. We warned at the time that these were just envy taxes, and that neither
would raise revenue for the Treasury – indeed, they would just drive business
abroad. In the event, the income tax receipts show that clearly. But now the
capital gains tax receipts are doing the same.

On 23 June 2010, CGT was raised from 18% to 28% for most taxpayers (there is a
10% ‘entrepreneurs’ rate to help people running businesses long-term).
Unusually, the hike came in June, 78 days deep into the tax year – which is
great for economists, who can see just what its effects in that tax year
actually were.

And what occurred, of course, was a marked fall in revenues once the higher
rate came in. On an annualised basis, the tax raised £8.2bn before 23 June, and
just £3.3bn afterwards. Told you so.

Sure, some of this massive difference was down to people cashing in assets
before the new tax hit (normal disposals were 76% down after 23 June, and even
lower-rate disposals were down 34% as entrepreneurs sold off their lifetime
businesses prior to being hit).

But that just shows that CGT is a voluntary tax. If people think the rate is
too high, they just hold off selling assets until policy changes. The only
people who are forced to sell assets and take the tax hit are people like
elderly people who build up assets through their lifetimes and then need to
fund their retirement, or episodes of medical or social care.

And people’s reluctance to volunteer for high rates of CGT is compounded by the
fact that they know a large part of their ‘gain’ is in fact merely inflation.
With inflation set to continue at morbid levels, they are likely to continue
hanging on to their real assets rather than exchange them for evaporating cash.

Which is bad news for the Chancellor. Why did he ever listen to Vince Cable?
But it is bad news too for business, and for the whole country. We need to make
the UK an attractive place to do business in – and indeed, to make capital
gains in. We need to make investors believe that we are really committed to low
taxes and a cost-effective public sector. It’s time to end these
counter-productively high rates.

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