Osborne Can Only Disappoint on Tax

This should be a good time for George Osborne. In the run-up to his March 21 budget fears of a double-dip have eased and consumer confidence has picked up.

The government borrowing numbers have come good for the budget, which should enable him to declare a deficit undershoot for this year. It is too early to say but the hope among the chancellor’s advisers, that the Office for Budget Responsibility (OBR), the independent watchdog, may have overdone the gloom for later years is not just wishful thinking.

Economic forecasters, against the pattern of the past two years, have begun to eye the possibility of revising up their growth forecasts for this year and one or two have done so.

The OBR may not go that far but there is no reason why it should change its forecasts of 0.7% growth this year, 2.1% in 2013.

And yet, Osborne finds himself assailed from all sides, particularly on tax, to the point where the budget can only be a disappointment. Unless he can simultaneously abolish the 50p top rate of income tax, cut Vat and raise the personal tax allowance to £10,000 some of his critics will claim he has under-delivered.

He is being pushed to cut tax despite the fact, as he made clear in interviews attending the G20 finance ministers’ meeting in Mexico, the scope is not there.

“Any tax cut would have to be paid for,” he said. A government that “has run out of money”, as he put it, is in no position to splash the cash, despite the prospect of a borrowing undershoot. The word from the Treasury is that with the budget deficit still well above £100 billion, this is no time to declare victory and hand taxpayers some of their money back.

So why the pressure on him to do so? Some of it is deliberately mischievous: Labour’s call for a temporary Vat cut is more about forcing a humiliating U-turn than helping the economy.

Much of it, however, reflects a genuine uncertainty about what Osborne stands for. What is his tax philosophy? Does he think that if he keeps saying he is an instinctive tax-cutter, while at the same time hiking taxes, people will not notice the rises? Gordon Brown tried something similar but it did not work.

Consider the record. Osborne’s coup de grace was in the autumn of 2007. An audacious plan to raise the inheritance tax threshold to £1m – a big cut in capital taxation – was so well received that Alistair Darling was forced to announce his own inheritance tax cut and Brown scrapped his plans for a snap election.

We have not heard much about inheritance tax since the May 2010 election. The only notable change in capital taxation was a rise in capital gains tax from 18% to 28%. Was Osborne ever committed to lowering capital taxes, or was it just a piece of political opportunism?

What about direct and indirect taxation? The Tories have been habitual hikers of Vat, beginning in 1979 with Sir Geoffrey Howe’s increase to 15% (from rates of 8% and 12.5%) and continuing with Norman Lamont’s hike to 17.5% in 1991. In each case, however, it was a hike with a purpose. Howe did it to cut income tax, Lamont to reduce local taxation. Osborne, when he raised Vat to 20%, just did it.

Not only are indirect taxes going up but so are direct ones. A chancellor who was philosophically opposed to higher direct taxes would have blocked the hike in National Insurance he inherited from Labour, rather than just easing its impact on employers.

Most chancellors stamp their authority on the tax debate. The noises off we are getting now would be ignored because people would know what was possible and what was pie in the sky. The strategy would be clear. MPs putting their two pence worth into calls for lower taxes would be given short shrift; junior ministers doing so – let alone deputy prime ministers – would be given a carpeting.

Instead, Danny Alexander, the Treasury chief secretary and Nick Clegg, the deputy prime minister, openly call for a big increase in the personal tax allowance in the budget, with Alexander saying it should be funded by abolishing pension relief for higher rate taxpayers.

I would be astonished if this relief was abolished – indeed there are no easy tax-raising hits to fund cuts elsewhere. I would be equally astonished if the 50p rate were to bite the dust this year. The “scrap the tax” campaign risks using all its ammunition up early.

But the fact is that any increase in the personal allowance beyond the planned rise to £8,105 in April will be seen as a Liberal Democrat measure, despite a long Tory history of taking people out of tax this way.

Osborne does not engage very well in the debate. On tax he is seen a blank page. The political opportunism tag sticks because he spends a significant amount of his time as the Tories’ chief election strategist. The risk with stretching yourself between two jobs is that you do neither well.

His allies would say that is unfair. He began with clear ideas about making Britain a lower tax economy. When he and David Cameron talked about “sharing the proceeds of growth”, they meant that any room for fiscal manoeuvre should be split between higher public spending and lower taxes.
The deficit changed all that, as did the compromises of coalition. As for a tax philosophy, he set one out in his last budget.

“Our taxes should be efficient and support growth,” he said. “They should be certain and predictable … simple to understand and easy to comply with. And our tax system should be fair, reward work, support aspiration and ask the most from those who can most afford it.”

That philosophy is set out clearly in what he has done on corporation tax, his supporters say, with a cut to 23% over the next three years and a well-received clarification of the rules on controlled foreign companies. The general anti avoidance rule (Gaar) to be unveiled in the budget is intended to make sure that by making everybody pay their fair share, tax rates can be lowered for all.

One day, maybe, that will happen and our tax-raising chancellor turn himself into a tax cutter. So far, however, he gets good marks for cutting the deficit, low ones for most other aspects of the job. It remains to be seen whether that verdict is any different after March 21.

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

This post originally appeared at David Smith’s EconomicsUK and is posted with permission.