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Lord Flight: The Coalition needs to cut spending more to avoid counter-productive tax increases

Flight HowardLord Flight is a former Shadow Chief Secretary to the Treasury who is now chairman of Flight & Partners Recovery Fund.

As I have commented previously, what the Conservative-led Government is failing to realise is that the great majority of citizens have had enough of tax increases and will react with great hostility to any more. Emotive and unreasonable attacks on the better off are no substitute for facing up to the realities that public spending will have to be cut considerably more than planned.

The Treasury and Government might usefully read George Trefgarne’s recent CPS Pamphlet on “Lessons from Britain’s Recovery in the 1930s”.  A Conservative-led Government cut actual spending by 10% p.a. which included reductions in public sector pay and was thus able to cut taxation.  It had the similar advantages of devaluation and cheap money.  In 1934 it reduced the top rate of income tax to 22.5% and increased personal allowances for all families with children.  At the heart of its policies and objectives was supporting the rising middle class, in particular enabling 2.5 million new purchasers to buy their own homes.  Economic growth in the second half of the 1930s averaged 4% p.a., the highest rates of growth in the whole of the 20th Century.

There may not be much easy popularity in it, but the Chancellor needs to realise that the half million or so people with incomes over £100k p.a., who have suffered the greatest increases in personal taxation, are the back bone of the country comprising those running both private and public sector entities and the professionals.

It is also a thoroughly sound principle for contributions to charities to be deductible against income for tax.  Mostly charities spend their money better and get better value than the Government.  If there is abuse as regards any particular charities, the Charity Commission should address this: but the principle – ironically introduced by Gordon Brown – is sound.  Similarly, though more esoteric, part of the “risk/reward” investment assessment by large investors in EIS qualifying small companies, has been that if the companies went bust – which is too often the case – the losses could be offset against income for tax.  Not only is it wrong for this to be changed, in effect retrospectively, for people who invested in the past in EIS qualifying companies, but also there is little point in otherwise improving the EIS regime, but then damaging the risk/reward trade-off for larger EIS investors.  The point also needs to be made that in economies where public spending is much lower as a proportion of GNP, new businesses have a much more successful track record.  In essence the need for tax incentives for small company investment is because their success track record in the UK is poor, largely reflecting the public sector financial demands on the overall economy which hampers growth in the private sector.

Whoever in the Treasury thought up the idea of restricting loss relief will find there is a heavy price to pay, both in terms of large reductions in contributions to charities and in the risk capital available for new/small businesses.

If the Conservative Party acted as its supporters intend it should – as the champion of the views and aspirations of the “silent majority” middle classes - we might solve the public debt problems quicker, restore economic growth faster, sort out a sensible relationship with the EU and get to grips with many other self-evident problems with which citizens are thoroughly fed up.  The Conservative leadership should listen to and act upon the views of its members.


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