The economy
A Chancellor's nerve
Jock Bruce-Gardyne
Chancellor Lawson, it seems to be generally agreed, has had an imperial lesson, although there is little inclination to predict that it may make him a Chancellor yet. For whatever reason — professional jealousy amongst the scribbling classes from whence he came of one who has soared so far? professional fears of VAT upon their respective organs? black propaganda from the City, which has some scores to settle? — Mr Lawson gets a rotten press these days. Well he's a grown lad, and amply able to look after himself. But in the course of sticking pins into his effigy some of the commentators are, I rather suspect, in danger of writing off his second Budget prematurely. It is said that his £1.5 billion `fiscal adjustment' has vanished down the plughole with poor old sterling; and that his brave schemes for dramatic further moves to 'fiscal neutrality' in the treatment of savings, and from direct to indirect taxation, have been torpedoed from his own backbenches.
I am not so sure. For one thing — as I tried to suggest in these columns a month ago — I suspect there is some weight to be attached to the argument that if he wants to toughen sterling, then some increase in borrowing (so long as it is coupled with a tight grip on its cost) might actually help. For another he is no slouch at the gentle arts of what the French call 'intoxication' — the management of expectations (some might say he is too little of a slouch at that for his own good). Stern warnings about the lack of room for tax cuts could easily turn out to be the prelude to some pleasant surprises. And for a third I think that those who tell us that he has lost his nerve in the recent turmoil and is ready to go quietly vastly underestimate our Nigel. He may have all sorts of character defects: a lack of nerve is not among them.
The big issue in this Budget, though, is the tax treatment of pensions. Tory back- benchers who have been aroused by the pensions industry seem to think that they have successfully seen off the threat of major changes. And certainly, if the decibel-count of protest I have listened to from interested institutions in the past few weeks is anything to go by, the Chancellor is in for a mother and father of a row if he does decide to take a real swipe at their tax privileges.
Yet there are some straws in the wind. I am indebted to Philip Chappell, co-author with newly-ennobled Lord Vinson of the Centre for Policy Studies' personalised pension blueprint which launched the whole debate last spring, for drawing my attention to a revealing little adjustment to the Treasury's sums. Back in September 1983 the Inland Revenue published a calculation of the cost to them of allowing employees and employers to offset their contributions to occupational funds against tax liability, and of exempting the institu- tions' investment income and lump sum payments at death or retirement from tax. It totted up to £5.1 billion. Last month Sir William Clark, chairman of the Tory Fi- nance Committee, invited them to do their sums again. This time they worked out at £6.85 billion.
Mr Chappell reckons that this is still a massive underestimate. He puts the true cost of tax-free contributions alone at £6.3 billion. That is as may be. To my mind what is interesting is that the Treasury's own estimates have jumped so sharply (even allowing for inflation in the mean- time). I can't help feeling they are trying to tell us something.
Let us, then, do a brief recap on alterna- tives. No one disputes that the present taxi treatment of lump sum payments is anoma- lous. Elsewhere the taxman waives his claim to the moneys going in, but catches them as they come out in the form of pensions. Lump sums escape at both ends. But the Chancellor, pressurised by reports of chief inspectors, major-generals and Sir Humphreys rushing off to grab their tax- free golden handshakes in droves has already undertaken not to touch the cash accumulated towards provision of such handshakes hitherto. He may well announce his intention to tax the proceeds of all future contributions to these hand- shakes — in equity he certainly should. But it will be years before this would produce more than chickenfeed.
The two other main candidates for treat- ment are contributions, and the invest- ment income of the institutions. The front-runner at present — I don't mean the `favourite': the institutions themselves look upon it like bubonic plague — is a tax, perhaps ten per cent, on income paid to pension funds and life offices on their investments.
The line of assault on this proposal was summed up by the chairman of the Life `Never mind, it hurts them more than it hurts you.' Offices' Association in a letter to Monday's Financial Times: 'Such a tax would In- crease labour costs substantially. Even a tax at what might be regarded as the low rate of 10 per cent could result in increased costs of up to 5 per cent of payroll.' Note carefully the :could' and 'up to' in that second sentence. Recent calculations have suggested that most occupational pensions are currently 'overfunded' (admittedly be cause of the strength of the stock market). Hence most of them could comfortably paY over to the Treasury without infringing l contractual obligations to employees without any increase in employers' CO tributions. Nevertheless, as Mr Sherlock was quick to remind the readers of the Financial Times, the Chancellor's favourite theme in recent months has been that more jobs would materialise if only the cost providing them could be restrained: and a tax on the investment income of occulia* tional pension funds would not sit altogether comfortably with that. But then perhaps it is worth reflecting that tak breaks like those available through the Business Expansion Scheme do not sit altogether comfortably with the theme of `fiscal neutrality' either. Philip Chappell's own preferred optd°11 involves a much more radical approach. • There is not the space to go into it in detail. But in simple terms it would involve transferring the tax take from the pensions to the contributions. Employers' contri.b11- Lions would in future be treated as a li 'benefit in kind' in rdin the hands of employees' and taxed accogly. The Chancelle'r could, he suggests, use the proceeds ° raise thresholds and take another WI million out of tax, to cut his need to borrow to the bone, or — more controversiallY to institute a single 25 per cent rate 01 income tax. He argues that if the extra cash were used for either the first or the third purpose the vast majority of employees would hardly notice the difference. . t On that, I think he is an optiinisr Nevertheless I wouldn't rule out the post" bility of some move in this direction although in logic a slice of the proceed should be earmarked for the exoneration of tax on all interest paid on Perannsi t,t Investments held to and for retireine" once that condition had been reached. There is, however, one proposition going the rounds which the Chant:at:PI; should treat with caution. It is argued the` now the banks are being subjected to the, composite rate of taxation on deposits, and required to hand over the resultant tats quarterly, fiscal equity demands that the building societies should deliver quarterly likewise (instead of waiting until JanuarY't as they do at present). Fair enough. Bu the Chancellor might be unwise to present this as a genuine reduction of the deficit to 1985-6, since — as the building societies point out — it would only transfer erh from gilts purchases. The City is getting sceptical about such artificial juggling vat. the deficit, and might take another repel" tion sourly.
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