Ryan Bourne of the Centre for Policy Studies: What we need from tomorrow's Budget

Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies.

The actions of businesses and individuals are driven by expectations. Taking steps and outlining plans to make the UK more business and work friendly in tomorrow’s Budget would significantly boost growth potential, even if the plans do not bear immediate fruit. Supply-side policies, whilst entirely necessary, take time to grip.

Below I have outlined things I would like to see from tomorrow’s Budget, and will be marking it against:

Tax and Spending
1)    Absolute commitment to fiscal consolidation. The government is likely to undershoot its public borrowing target by £8billion this financial year. This shouldn’t be used for Budget give-aways. Highly targeted, small tax cuts might be useful in some areas. But it’s imperative the Chancellor does not attempt to ease burdens on departmental budgets. In particular, he should not increase the already well-protected health budget simply to meet the real-terms spending increase commitment.

2)    Extension of the Income Tax personal allowance. The coalition’s aim to increase tax allowances to £10,000 – lifting millions out of tax – is admirable. In fact, the suggestion to do this was first made by Maurice Saatchi and Peter Warburton. A significant step toward this tomorrow would be most welcome.

3)    Abolish the 50p income tax rate. The conclusions of Jill Kirby and Iain Griffith’s work on the 50p rate still stand. The negative impact on incentives and long-term perceptions of the UK is stifling the rebuilding of enterprise. It is unlikely to be raising significant revenue, and the accompanying withdrawal of personal allowances has led to widely variable marginal tax rates. It should be reversed immediately – the economic implications are more important than the political.

4)    A commitment to abolish NICs. The government’s pension reforms have removed the last justification for the continuation of NICs. As David Martin pointed out , NICs are complicated, create perverse incentives and are by-and large used in the same way as other government receipts. They should be merged with income tax, with a simple payroll tax replacing employers’ NICs. The greater transparency and need to avoid punishing entrepreneurs will likely require a small tax cut – so this should be announced now as a policy to be completed by the end of the Parliament.

5)    A commitment to abolish stamp duty on share transactions. The London Stock Exchange estimates that the stimulus effect of abolition could increase GDP by £12 billion, and make equity capital for UK businesses around 9% less expensive. But these effects are dynamic. Outlining the planned abolition for the latter stages of the Parliament would minimise losses to government tax revenue.

6)    Marriage tax-break. The Government has taken some difficult action on child and working family tax credits as part of the fiscal consolidation. It is important to show that it is still committed to the role of the family, irrespective of income. The reinstatement of a tax break for couples who are married or in a civil partnership would send an inexpensive signal that family and commitment are important institutions in society – and correct the inherent bias against married couples in the current system.

Pro-Growth Interventions
7)    A commitment to even lower corporation tax rates. The coalition should be bolder and aim to reduce the main rate of corporation tax to 20% by 2020. This would send a clear message of the intention to make Britain ‘open for business’, with international evidence in our growth paper suggesting government revenue would not be sacrificed as a result.

8)    Fundamental reform of controlled foreign company rules. The UK’s tax and regulatory systems are increasingly discouraging multinationals from headquartering here. The lost economic value of this is clear. With headquarters come financial, HR and top end management functions, quotations on the UK stock exchange and well-paid, highly skilled jobs. The Budget should usefully set out the government’s long-term intentions for tax treatment of overseas profits in light of this, but any interim arrangements would be welcome.

9)    Avoid growth-stifling fuel and air passenger duty increases. Much has been said on the need for the Chancellor to cancel the planned fuel and air passenger duty hikes to ease the burden on working families. But the increases would also have adversely affected businesses – and so it is heartening that the Chancellor seems poise to halt both the fuel escalator and the air passenger duty. If more tax revenues are really necessary, then other duties (cigarettes, alcohol) would be far less distortionary for growth.

10)    Provide resources for the long-term reskilling of the workforce. Youth unemployment is a significant problem in the UK. It risks the creation of a generation of long-term economically inactive individuals. Work by John Llewellyn showed that in the short-term, providing resources for low-cost job search is helpful. In the longer term, public training and private sector incentive schemes can work well so long as they are short, carefully directed and carefully monitored. More resources for Job Centre schemes and apprenticeships could prove important in the fight to halt this worrying trend, so long as they meet these criteria.

11)    Enterprise Zones. The Chancellor is expected to announce areas which will benefit from lower taxes and relaxation of planning laws to stimulate economic activity. Direct government funding should be minimal (the announced £100m) and the zones set up in areas of high-growth potential – tailored to local needs. Incentives structures should minimise deadweight and displacement, and seek to maximise additional job creation. Transitional Enterprise Zones as suggested by Charlie Elphicke, could be an important tool in protecting industry-specific regional clusters (such as Sandwich in Kent).

12)    Reform of UKTI. Any long-term growth strategy for the UK will require UK businesses tapping into the emerging markets.  Our recent pamphlet suggests just 5% of UK SMEs currently export to these markets – stating concerns which fall firmly under the remit of UKTI. The resources must be effectively targeted to enhance export orientation to these areas.

Incentives to Save
13)    Encouraging saving. The long-term aim of the government should be an economy built on saving and investment rather than debt-fuelled consumption. A means of encouraging saving would be to merge tax-incentivised contribution limits of ISAs and pension savings to £35,000, granting the opportunity to put the whole limit into an ISA.