By Paul Goodman
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Our recent story: from finance and housing booms…
The story of the British economy during recent decades has been a cyclical one, displaying the self-reinforcing circularity of a Jacobean revenge tragedy. The first act has seen governments raise spending, cut taxes and keep interest rates low. The second has seen a boom, fuelled by dizzying rises in share and property prices, especially in London and the south-east, thus widening the gap between north and south: between 1997 and 2010, immigration spiralled and this, together with house-building restrictions and modern levels of family break-up, drove property prices higher still – and widened a generation gap between those who own and those who don't. The final act has seen bust, as interest rates have risen to choke off inflation, or taxes have been hiked to tackle deficits and debt, or both. And then it all begins again.
The economic cycle is as intrinsic to developed societies as the seasonal cycle is to the natural world. But the country we helped defeat in two world wars has coped with it better than we. Germany has lower rates of family break-up and a better education system, less immigration and a more durable record on skills, higher living standards and less housing volatility. No wonder Iain Duncan Smith is trying to bolster family stability by making work pay, Theresa May and Damian Green are committed to bringing immigration down to the tens of thousands, John Hayes is working to create apprenticeships and Michael Gove is striving to overhaul British schools.
…To finance and housing busts…
George Osborne wants to make homes affordable for younger buyers, hence the planning reforms that are expected to form part of this afternoon's budget, and the Government's dubious scheme to grant some first-time buyers taxpayer-funded subsidies. Since there will always be some redistribution within the tax system from rich to poor – and there ought to be more in the housing market from old to young – it makes sense for the transfer to be made when houses are sold. So for the Chancellor this afternoon to raise stamp duty for the more expensive properties would be one of the less bad options and closing housing tax loopholes for people from overseas among the good ones, as Charlie Elphicke indicated recently on this site. It is very hard to justify 40% capital gains tax relief on windfall gains in property rises.
Tax relief on mortgage interest was once a similar shibboleth, and a Conservative Government eventually did away with it. But before enthusiasm for taxes on property or wealth sweeps us along in its wake, it is worth remembering what ought to be the first item in every Tories' catechism: the law of unexpected consequences. New property taxes would require revaluations, with their baggage of injustices, hikes and grievances. Three pounds in ten of income tax is paid by the top one per cent of earners: tweak that wealth tax dial too hard, and they will be up and off abroad. The genius of Margaret Thatcher was to grasp that those homeowning strivers – "our people" – don't have different interests from that one per cent: ultimately, they have the same.
…But this budget should beware in addressing them of the law of unexpected consequences
After all, both want the freedom to earn money, keep it and pass it in to their children, so that it can "cascade down the generations". Inheriting wealth, in Lady Thatcher's view, didn't exist in opposition to earning it: indeed, the second was a natural consequence of the first. And since both better-off, southern-based voters and not-so-well-off, northern-based ones want to pass on the fruits of their labour to the next generation, she saw them as allies who together could make the economic cake larger, not as rivals doomed to squabble over diminshing proceeds. To borrow a phrase from the Chancellor, they were and are "all in it together". Her most dramatic tax rise was on spending – the 1979 VAT rise – rather than wealth or property.
This mighty cross-class alliance that she built delivered four successive election victories. It is broadly the formula for winning followed by every successful recent centre-right leader in the Anglosphere: John Howard, George W.Bush, Stephen Harper. Tony Abbott is currently taking the same course in Australia. But David Cameron and Osborne do not lead a Conservative Government. They lead a Coalition one, and the path it is taking is different. Today's budget will not, apparently, cut the 50p rate to 40p at once and all in one go. Nick Clegg wants a tycoon tax. Vince Cable still wants a mansion tax. Danny Alexander wants a further clampdown on tax avoidance. Ed Davey will stick by the green taxes of which Chris Huhne was so fond.
Too much talk of tax rises. Too little focus to date on spending cuts. Let's hope this budget doesn't take the path to taxes and decline.
More and more people are being dragged into the 40p band, which Nigel Lawson originally envisaged as the top rate. The Institute for Fiscal Studies has calculated that by the time of the next election one in four people could be paying tax at 40p – dragged into the band by "bracket creep". As it has pointed out: "it's not so long ago that only about one in 20 taxpayers were paying the higher rate". 40p Britain may see the budget squeeze its pension savings and its child benefit is at risk (the raising of the cut-off to £50,000 would not solve the plan's unfairnesses). There is no sure sign yet that the budget will fund raising allowances or cutting corporation tax by further reductions in the rate of public spending, the bedrock of economic plans that Tim and I have championed – see here and here. Spending is the budget dog that, so far, hasn't barked.
Instead, the budget conversation to date has been all about tax, tax, tax. The Liberal Democrats want new taxes. Few frontbench Tories make the case for cutting those we've already got. Indeed, some Conservative MPs want the 50p rate to stay for political reasons, and it's legitimate to ask how different this budget would be were Cameron to have a majority. And in the background lurk Eds Miliband and Balls. They don't have any policies – as their confusions on 50p yesterday proved – but this tax talk is clearing ground now that they can occupy later. The post-oil shock "battle of ideas" paved the way for an era of lower taxes. I fear that its post-Lehman collapse equivalent is setting the scene for an era of higher ones.
Such a direction of travel carries with it planet-sized political risks for the Conservative Party. Better-off, southern-based voters do not all live in solid blue shire seats, and are under no obligation to vote Tory, whether so or not. And if the Conservative Party gives up on assembling the modern equivalent of the Thatcher coalition – one which stretches from north to south, from old to young, from the rich to the striving classes – many of them won't do so. But what matters most about today's budget isn't what's right for the party but what's right for the country. It has the capacity to be as memorable as those of 1981 or 1988. Let's hope that it's a package for growth, based on more deregulation and lower spending – not one stuffed with measures that are individually defensible, but which collectively nudge Britain along the low road to taxes and decline.