Ryan Bourne: Osborne must cut taxes and he must cut them now

Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies and author of Adrenalin Now – Funded, popular tax cuts to boost the economy. 

At the Conservative Party conference last week, George Osborne said: “I’m a believer in tax cuts: permanent tax cuts, paid for by sound public finances.”

That makes two of us. But the way in which Osborne outlined his argument was to suggest that the Government could not fund tax cuts now. The reality is different. Even putting aside the beneficial dynamic effects of targeted tax cuts, they could be funded now if the Government changed its political priorities, as indicated in Andrew Tyrie’s critique of government policy for the CPS last week.

In fact, we can’t afford not to. According to the World Economic Forum, our position in the tax competitiveness tables has plummeted from 4^th in 1997 to 94^th today. Coupled with 83^rd place for the "burden of government regulation", it’s not difficult to see why the UK’s underlying growth rate is so poor.

What’s more, the Government needs the non-debt financed private sector industries to grow substantially if it is to meet its fiscal mandate. Illusory growth of the past ten years driven by real estate, financial services and ever increasing government spending has masked the increasing uncompetitiveness of remaining sectors. If growth is half that forecast across this Parliament, the deficit will still be 9% of GDP by 2015.

With the economy flat-lining and unemployment now up to 2.57 million, radical action is required. But options are limited. Despite what Labour tells us, there is little reason to think further fiscal stimulus through deficit-spending is desirable or would be particularly effective. Meanwhile, the results of further Quantitative Easing remain to be seen.

What the Government should be doing is looking to see how it could rebalance current tax and spending priorities to cut the cost of employment, attract inward investment and ease the burden on families.

This would involve hard choices. In a CPS Pointmaker, released today, I outline some of the tough decisions that I would take to enhance our competitiveness. Not all of them will be popular with readers here - but it’s the sort of analysis the Government should be doing across all of its spending: identifying whether spending, or tax reliefs, are fulfilling certain aims, and if not, scrapping them to free up funds.

In "Adrenalin Now", I suggest the Government should start by examining the effectiveness of the whole pension tax relief system. Scrapping the higher rate pension tax relief would save £7 billion. Furthermore, abolishing contracting out of S2P and ending the 25% tax-free lump sum entitlement on retirement would save a further £6 billion. The changes would be the first stage of moving towards a simplified tax-incentivised saving framework, as outlined in Michael Johnson’s recent CPS paper.

These savings, alongside cutting the international aid budget to 2010/11 levels, would together provide £14 billion for the Government to use for targeted tax cuts now. With this, it could make substantial moves to improve the UK’s competitiveness for 2012/13, whilst also easing the burden on families:

• Cutting the main rate of employer NICs to 12%
• Granting two year employer NICs holidays to firms with 0-4 workers on the next four staff employed
• Cutting the main rate of Corporation tax to 21% now
• Increasing the income tax personal allowance to £8605 for 2012/13
• Abolishing the 50p income tax rate

It’s doubtful whether the Government would be willing to undertake such a shift in policy. As Fraser Nelson has noted, the Cameroons have not exactly espoused a great desire to cut taxes since Cameron’s election to the leadership in 2005. Unfortunately for them, this seems to be another instance where they are on the wrong side of public opinion.

In polling undertaken by ComRes to coincide with this publication, we found that if forced to choose, 47% of people say they would prefer Government used targeted tax cuts to try to stimulate growth, compared to 34% who want increased public spending. Both reducing employers’ NICs (69%) and raising the personal allowance faster (67%) would be incredibly popular, as would trimming the international aid budget (73%).

And whilst respondents were more divided about the other measures to fund these tax cuts in the short-term (there was strong opposition to abolishing the tax-free pension lump sum) and the abolition of the 50p rate, when asked to agree or disagree with statements, they seemed more persuaded by their merits.

43% of people agree, for example, that abolishing the higher rate tax relief for pensions would show that the Government is committed to sharing pain fairly (23% disagree). And support for the continuation of the 50p rate is not one made out of principle. When offered a policy package of its abolition alongside a £500 increase in the income tax personal allowance, 37% support the policy compared to 34% who oppose – a huge shift from the pure abolition question.

Agree or disagree with the policy prescriptions, what this does show is that the Government does have options, even within the deficit reduction framework. It is disingenuous to suggest otherwise. Sure, it would likely entail taking on particular interest groups – but if the arguments are made well enough, the British public could be receptive to a programme of well-targeted tax cuts.