Tom Papworth is Associate Director of Economic Policy at CentreForum, the liberal think tank.
Wednesday’s budget is likely to be the result of a struggle within government – as much between prudent fiscal managers and election strategists as between Conservatives and Liberal Democrats. But there are surely some budget measures which will please both parties, further the government’s successful record on the economy and please the majority of voters.
With this in mind, CentreForum has proposed a raft of policy measures that would cut taxes by over £2.2 billion and help boost entrepreneurship, build a shareholder democracy and strengthen local accountability.
More than a seventh of the workforce are self-employed – a record. Over half the self-employed earn less than £12,000 a year. So far the coalition has focused on cutting income tax for the bulk of the population by raising the Personal Allowance, but further personal allowance rises will no longer help the poorest. CentreForum proposes targeting the next round of direct tax cuts at low-income self-employed workers.
Class 2 national Insurance is a flat fee of £2.70 a week on earnings above £5,725 – a poll tax on the self-employed (and we all know how much Conservatives hate a poll tax!). It raises a paltry £250 million a year, much of which goes on administration. Let’s not tinker about at the edges. Let’s just scrap it entirely. Eliminating an entire class of tax is simple and it clearly benefits entrepreneurship.
Class 4 NICs (proportional to income) kick in at around £8,000, affecting more self-employed workers than income tax. The government should raise this threshold to match the income tax Personal Allowance (which is about to hit £10,000). A small increase in the rate to taper the gain away from middle and higher earners (without making anybody worse off) would reduce the cost to the Treasury to just £170 million.
These two measures would give let self-employed workers take home up to £330 a year more of their hard-earned money – a welcome boost for those earning £10,000 a year. It would demonstrate the government’s support for enterprise. And it would simplify the far-too-complex tax system.
And while we’re making tax simple and fair, let’s scrap “Red Diesel”, the absurd bung to farmers that enables them to fill up their tractors (and, if they want to indulge in hard-to-prove tax evasion, their Range Rovers) with low-tax fuel. It costs us £2.4 billion per annum and has no justifiable economic benefit.
Where else might the two halves of the Coalition agree?
One area might be denationalising banking and creating a shareholder society. Three years ago CentreForum published a paper by Stephen Williams MP proposing to privatise the government’s stakes in Royal Bank of Scotland and Lloyds through a distribution of shares to the British public, with no cash required from them up front. Our mechanism would ensure that HM Treasury recovered its £66 billion investment (and, we would hope, used it to pay down the national debt) while letting UK taxpayers and their children reap any future windfall. This would be good for the economy, good for citizens and might bolster support for our capitalist society.
Lastly, there’s local government. The Conservative Party claim they “want to shift power from Westminster to people” by giving “more financial freedoms to help promote economic growth.” The Liberal Democrats have called for “The strengthening of local authorities… The freeing up of local administration by ending detailed central control [and] Giving local government financial autonomy and more revenue-raising powers.” Yet in practice the Coalition government has made local authorities ever more dependent on Whitehall for income, while piling additional statutory duties on them.
The Council Tax Freeze Grant has replaced locally raised money with centrally raised funds. Councils have little choice but to accept it. Rejecting it does not spare local taxpayers the cost. They just pay twice, with higher Council Tax for their own area and higher national taxes to benefit those whose councils took the grant. In the interests of localism it should be abolished, and with it the 2% cap on Council Tax rises. Rather than assuming that voters make rational choices at General Elections but can’t be trusted locally, let’s turn local elections into a real contest where the tax risers can take on the tax freezers and the tax cutters. That’s what localism and democracy is all about, after all.
CentreForum would like to see the Chancellor go further, however, eliminating many of the 1,338 statutory duties on local government and radically devolving tax raising and spending powers to local government. But realistically, that’s very unlikely. After all, this is only the Budget.