Sir John Redwood is MP for Wokingham, and is a former Secretary of State for Wales. His most recent book is “We Don’t believe you: Why Populists reject the Establishment”.
This budget is more than usually important. It is the first budget for the period after we have left the EU. It is an opportunity to show how we can use the new found freedoms after departure, and spend the additional money we will save by ending our budget contributions to Brussels. It takes place against a gloomy world background, with China’s virus hitting the output and trade of the world’s second largest economy, whilst the EU has slowed almost to a halt with a big decline in manufacturing.
I remember publishing a draft indicative budget for the first year after our exit from the EU for the Vote Leave campaign in 2016. That budget assumed we would end all budget contributions two years after the referendum. It proposed a mixture of spending increases and tax cuts to spend the £10 billion a year (now higher) we would be saving by ending our net contributions. On the tax cutting side I favoured removing VAT from green products, from home heating bills, from carry cots, from child seats, and from female hygiene products. It is important we do use our freedom to remove VAT from items we would not choose to tax, as a visible sign of how leaving the EU can make things better. I also proposed a Council Tax reduction and a Stamp Duty reduction. On the spending side I set out priorities to boost spending on the NHS, social care and transport. It included 10,000 more doctors, 60,000 more nurses, cuts in hospital car parking charges, more for social care and local roads, and extra for disability and cancer treatments. These were presented as an early budget submission to the Government in the event of a Leave vote.
The spending proposals have been subsumed by more generous ones in recent government actions. The budget should confirm the promised substantial increase in spending on the NHS to allow more staff and new treatments, allowing necessary recruitment of additional nurses and doctors to cope with increased demand. It will pay for the increase in per pupil funding at state schools, and the step change in investment in rail and road infrastructure already announced. There are various other good causes that would like additional money. There also needs to be proper scrutiny of current spending. There are old programmes that can be discontinued, and new ways of raising productivity and quality to cut the costs of some existing services. There are activities and assets that can be transferred to the private sector through for example the sale of surplus land from the MOD and Network Rail, and the sale of homes from social provision to tenants who would like to own their own property. The NHS of course will not be privatised.
The big issue in the budget that is yet to be resolved with public decisions is how much tax should the government collect and how should it raise it? The new Chancellor could have another go at explaining the significance of the Laffer Curve to the Treasury. George Osborne signed the Treasury up to the important notion that if you set a tax rate too high you will collect less revenue. The Treasury then assumed very high rates of tax before the negative Laffer effect hit the revenues collected. In practice, taxes like Capital Gains, Stamp Duty Land Tax and higher rate Income Tax can suffer falling revenues at lower rates.
Capital Gains is only payable if someone sells an asset. Many people do not trade down or up in the property market as they would like to because the Stamp Duties on dearer properties and second properties are now so high, seeing 28 per cent as too much when they need to switch homes subject to tax. Many self-employed people or people working for companies they control do not pay themselves larger salaries if Income Tax is too high, or they choose to work less or to earn more outside the country than in the UK under different legal tax arrangements. Some simply emigrate, taking their investment with them. Every time Conservative governments have cut the top rate of Income Tax, the take has gone up, and better off people have paid a bigger proportion of the total as a result.
We need to raise more money from the better off to pay for our public services. The way to do that is set tax rates that rich people will stay to pay. The top rate of Income Tax was cut from 50 per cent to 45 per cent and raised more money. A further cut to 40 per cent should also raise more. Taking Stamp Duty rates back to somewhere nearer the levels of 2015 before the big increases would probably raise more money from dearer properties as transactions would expand again. Taking CGT down from the current two tier 28/20 per cent structure would probably increase CGT revenue. In each case the Chancellor could say he would adjust the rate up if by any chance there was a shortfall and he had misjudged the right inflection point on the Laffer Curve of where you start to lose revenue from higher rates.
None of these tax cuts cost overall revenue. The budget also needs to give some money back to all taxpayers by reducing bills for everyone in ways that do cost revenue, at least in the short term. The UK is quite highly taxed. It needs to be more worthwhile to work, with less money taken out of pay packets in stoppages. This can be done by cutting National Insurance, as the Government has promised. It could also be augmented by a cut in the standard rate of Income Tax. Any tax cut helps reduce the employment trap created by benefit withdrawal as people find jobs from unemployment. The marginal rate of tax and benefit withdrawal is too high in some cases. The Government should also look again at its IR35 decision which is leading to losses of contracts and of whole businesses amongst some smaller contractors.
We hear the Government is working on the fiscal framework. State debt in the UK, adjusted for all the debt the state has bought in and owes itself, is not too high. Borrowing a bit more today at very low rates of interest to undertake the Prime Minister’s infrastructure revolution is fine. Spending a bit more on crucial public services is desirable and affordable. There are still areas of spending to make more efficient or to discontinue. The Government should aim for a decent sized fiscal injection given the sharp slowdown in the world economy and the need to promote growth and prosperity at home. The rest of the world is embarked on policies to offset the industrial decline and the Chinese slowdown. We need tax cuts for all. The UK has to show it is open for business and a place where investment is worthwhile and success is rewarded. Above all, to keep the success of job creation advancing it needs to be more worthwhile to work.