Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
The easiest and most effective way to get rid of a Budget deficit has, in the past, been growth of the economy, both increasing tax revenues and reducing welfare expenditure.
This time around this has been slow to develop, although the recent Price Waterhouse Coopers’ Report points to a £45 billion improvement in the public finances over the next three years. But to bring the public finances into order will require either cuts in spending or increases in taxes and likely both.
So far the Government has been surprisingly cautious of identifying ways to reduce or at least contain spending. It is clear that sooner or later both health and welfare expenditure will have to be contained. In the meantime, Treasury initiatives appear to have been more engaged in identifying further “Gordon Brown”-type stealth taxes to raise revenue.
Here, as the Chancellor has experienced painfully, fiscal attack on the self-employed is politically dangerous – not just in the context of manifesto commitments but also in attacking the Thatcherite philosophy of self-sufficiency.
A major area of success of the British economy in the last five years has been the growth of new small businesses and self-employment. The self-employed get no sick pay, no holiday pay, no minimum wage etc., against which it has been understood they have a lower cost national insurance and tax regime.
Yet the self-employed and those working for SMEs have been the main area of fiscal attack by the Treasury. The Class 4 NI proposals, now withdrawn, were one of several such fiscal initiatives. Digital tax returns will impose the requirement on the self-employed to produce accounts and pay tax 4 times a year – hitting five million people with extra costs, to little use.
While last year and this year there has been some mitigation of the increase in business rates, in London and the South East there are still large increases, typically for local shops. The reduction in tax free dividends from £5,000 to £2,000 per annum will hit SME worker shareholders who part of their remuneration in the form of dividends.
Last year there was the major tax attack on small buy-to-let landlords, reducing the interest charge they could claim against revenues and increasing stamp duties by a further three per cent.
The lower VAT system for small businesses is being, effectively, abolished, whereas to date small businesses could pay a reduced rate of VAT provided they did not claim expenses (this actually benefited HMRC as well).
Now we will be facing huge increases in probate charges after death, and the EU has imposed requirements on Enterprise Investment Scheme-qualifying finance for SMEs, making it more difficult and more expensive to qualify.
Under the excuse of “fairness”, there is clearly a Treasury programme to reduce the existing tax benefits and incentives of self-employment. Yet the reverse of this is needed to help contain welfare and health expenditure.
Part of the reason may be that HMRC sees the danger of loss of tax revenue as many more people transfer to a self-employed status: it is noticeably cheaper for companies to take on self-employed staff for particular tasks, than to hire full time employees, qualifying for the now increased minimum wage.
But in scrambling around trying protect tax revenues from the rise of the self-employed, the Treasury is alienating a core five million Conservative Party supporters – and sending the wrong economic signals.
We need people to be more self-sufficient and less dependent on state welfare and health support, and that means we must encourage the entrepreneurial explosion of SMEs and the self-employed.