Straws in the budget wind
MONEY
NICHOLAS DAVENPORT
It ought to be a jolly budget but I am afraid it may be another kill-joy. With the enormous surplus the Chancellor has gathered in there ought to be 6d off income tax (as Mr Heath has promised us) and a 10 per cent cut in indirect taxation. This would make us all work harder, save more and spend less in anticipa- tion of a fall in shop prices. Consider the extra- ordinary surplus which has blown up. Mt Jenkins last year budgeted for a revenue surplus over expenditure of £1,386 million. The filial Exchequer return of the financial year reveals that he has secured £360 million more than he expected—a surplus of £1,746 million! Nothing- like such conservative budgeting has ever been seen before. We must be the most over-taxed
nation in the world. Not only over-taxed but over-governed and over-exhorted! No wonder'
we are feeling browned-off, bitter and non-co-' operative. A perfect case-history for the psycho-. logiSt, if only Chancellors would study psyChology! Two months ago Mr Jenkins was saying to the • Overseas Bankers Club: 'This financial year I expect my net borrowing requirement to be virtually nil (against a net borrowing of over £1,300 million in the previous year). Next year on present prospects I expect to be a net re- payer of debt on a substantial scale. In other words I can claim to have made a far bigger contribution to controlling the money supply than I am asking the banks to make by means of what they themselves described as a marginal reduction in the volume of their lending to the private sector.' The Chancellor may have re- gretted this remark. When he becomes a net' repayer of debt, as he is today, he puts funds into:the gilt-edged market and so increases the money supply. The Government broker has been doing just that when he intervenes to steady market prices.. To decrease the money supply the Chancellor must induce the invest- ment institutions and ,private savers -to buy government stocks in the market. Here is the first straw in the budget. wind. To induce them he must give them an incentive and the incentive he may favour is to make the net income on government stocks 'franked' income for pur- poses of assessing corporation tax.
A Treasury concession is usually matched by a new restriction. The Chancellor would not like to see rich people borrowing from the banks in order to jump into the gilt-edged market for the sharp recovery he would then be generating. So he might well restrict the privilege we now enjoy of setting off the inter- est on a bank loan against our income tax anfli., surtax. It would have to be a reasonable restric- tion because he could not afford to upset the house mortgage market which has been built up on the basis of this tax abatement. Bank loans for house purchase up to a certain limit might well be exempted.
hi a period of inflation the possession of capital, as we all know, gives an advantage to the owner over the man without capital, for he can invest it to gain the capital appreciation which inflation brings in the property and equity markets. But Mr Jenkins cannot hope to counter all the evils of inflation by discrimi- natory taxation in a couple of budgets. He did his best, in his last budget. He introduced a sur- charge on investment income starting at 2s in the £ on investment incomes of £3,000 and rising to 9s in the £ on investment incomes over £8,000. This was in effect a capital levy and Mr Jenkins cannot repeat it. His socialist pre- decessor, Stafford Cripps, who did much the same thing, actually called it a 'once for all.' But Mr Jenkins might well be looking round to see how far he can restrain the rise in property and equity share prices which gives such a 'killing' to the rich capitalist. The ob- vious way would be to raise corporation tax by another 24 per cent to 45 per cent. It would appeal to his left and it would not lose any more votes.
There is, in fact, a case for taking such action. In the 1968/69 budget accounts corporation tax was estimated to produce £1,426 million. Devaluation brought an immediate rise in prices and in company profits. Some of the best managed companies have been able to report quite spectacular increases. The company average rise for the financial year may be close on 20 per cent and although the rise in profits is slowing down the prospect for the current financial year is for further growth in company profitability. So it might be said that a 24 per cent raise in corporation tax would be moderate. Five per cent therefore is not im- possible. It would obviate any further rise in consumer taxation which I regard as in- defensible.
The fall in the index of industrial share prices —8 per cent since January—seems to have dis- counted a modest increase in corporation tax
but not perhaps 5 per cent. The worst hit would be the market in property shares. It might be thought that in view of the 35 per cent rise in equity share prices in the calendar year 1968 the -Chancellor will be tempted to increase the capital gains tax which is now 30 per cent for long-term gains. But I would have thought this to be unlikely. The capital gains tax was esti- mated to bring in £45 million against only f16 million realised in the previous year. It will probably bring in even more if it is not raised but less if it is. Investors will simply not sell if they think the Government is grabbing too high a proportion of the profit. In America the tax is only 25 per cent with more set-offs than ours and yet this has already produced stiff resistance to selling on the part of rich family funds.
Nevertheless I cannot see Mr Jenkins allow- Mg the portfolio investor to get away scot free. There has been a rush recently to set up 'off- shore' funds where the promoting merchant bank or unit trust management raises a dollar loan (which can be invested anywhere free of capital gains tax) and invites sterling subscrip- tions. This may not hurt the balance of pay- ments but it looks bad to see investors flying out of the country to avoid the machinations of the-Chancellor. The rush to Nassau, Bermuda .apd the Cayman Islands—surely someone should tell Mr Webster that he is missing a good thing for Anguilla by not preferring respectable British unit trust managers to wicked American gamblers—suggests that the market expects Mr' Jenkins to clamp down on the 'off-shore' fund. As for the existing dollar portfolios I have already mentioned that Mr Catherwood wants Mr Jenkins to put a 5 per cent annual currency levy on them in place of the 25 per cent grab of the dollar premium on sales (which he thinks would bring in £200 million a year) and in view of the fact that the balance of payments return has revealed that outward portfolio investment last year amounted to £163 million against £30 million in 1967 we may be heading for some new portfolio tax or restraint. All this is surmise but not, I hope, unintelligent anticipation. Which reminds me, if I were Mr Jenkins I would put a, swingeing tax on Cabinet leaks.
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