In the City
The need for tax reform
Tony Rudd
Geoffrey Howe's budget is a gloomy affair. The TUC, the CBI, even the Stock Exchange are united in disappointment. But it Was unreal to expect anything different. The state of the Government's finances, like that of the economy as a whole, has become parlous in the extreme. The bor rowing requirement was shooting out of control and had to be restrained. Otherwise the funding of a figure of say £14,000 million of borrowing in the next fiscal year would have condemned the rest of the country, and particularly private industry, to a continuance of throttlingly high interest rates. Thus if the Chancellor felt himself C, ornmitted to bringing interest rates down, lf only to ensure that sterling did not go through the roof, he had to act on the PSBR, and to do that he had to reverse the trend begun in Mr Healey's budget of April 1978 of shielding the consumer from thei rigours of the recession.
It can be a matter of debate how exactly he should have handed out this poisonous !Tledicine; but the overall exercise was Inevitably going to be unpopular. Stepping away from the indexation of the tax allow ances is perhaps as counter-productive a manner of getting in new revenue as any, because it opens up the poverty trap again at the bottom of the tax scales and, what is SO serious, it increases the incentive not to Work, But in a sense this is a quibble. The consumer had to pay, and makinghim empty his pockets on the table is a painful exercise at the best of times. The most that the Chancellor has bought by his draconian measures has been the continuity of Government policy. They are not exactly on course (who is?), but they can at least claim that they are still trying to tackle the basic issues of the country, namely the excess of public expenditure and the danger of rampant inflation. Wobbly though their policy may have looked, and may still look, at least the show still goes on. And for them that is vital. Were this essentially political commitment to be abandoned (for instance had the Chancellor not cut consumer expenditure and allowed the PSBR to have roared ahead to £14,000 million next year) a number of sectional interests would have been delight ed, but the thread which holds this administration together would have been cut. Although each of the sectional interests May know what it prefers, the totality of these interestswouldnot haveamounted to a credible economic policy. The fact is we are stuck with Mrs Thatcher's strategy, and, although this may bend slightly from side to Side, we are going to be carried forward by it nght until the day of the next election. The really interesting part of Sir Geoffrey's budget did not lie in its 'macroeconomic' impact, which was predictable, but in its achievements and its failures in altering and not altering the rules concerning savings and investment. The most important thing Government can do today is to foster the creation of new industry. Propping up the old may be necessary politically but is economically disastrous. Employment in the late Eighties and in the Nineties has got to come from new technologies and new businesses. Everything should be done to make it possible to increase investment so that jobs in these new areas are being created. Sir Geoffrey has introduced some more encouraging legislation to do exactly that. Individuals are going to be able to use up to £10,000 of their income in making investments in certain new companies. This is a variation of the Loi Monory brought in by the French to encourage investment in quoted secur ities, in that the concession is applied not to all quoted securities but specifically to new businesses. A more significant concession is the extension of the system whereby the individual can offset losses in new ventures against his income, which was introduced in last year's budget. This could be really important; large companies can now invest part of their taxable income in venture capital and know that if any of the ventures go sour, the Government will pay for them. In effect it amounts to no-risk investment in highly risky projects. It is difficult to imagine a more beneficial arrangement. It is only to be hoped that the corporate sector will make real use of the concession. So much for the good aspects of the reform from this area.
What is disappointing is that there has been no attempt to tackle the extremely counter-productive way that the various forms of savings in Britain are taxed. When the individual saves through a pension scheme and insurance policy, or any form of contractual method, he is given the most remarkable tax concessions; when he invests as an individual he gets none. Not only does this discriminate against personal investment, as distinct from the investment which fund managers may make on individual's behalf, but it also costs the Exchequer a great deal. It is time to tackle the whole network of concessions in this area, the tax-free treatment meted out to pension fund contributions and to pension fund income being the most obvious and costly. The whole apparatus of contractual savings in this country, which is treated as some sort of bastion of an ordered society in Whitehall, needs to be looked at most critically. The simple fact is that every concession granted is at the cost of increased rates of tax for the rest of us.
Furthermore, if the Government really believes that the future of this country depends on risk-taking, it is not enough just to provide more opportunities; the balance between risk and security has to be altered. As is evident to everybody, the British economy produces very little security at the moment. Only North Sea oil does that. The rest of our productive enterprise provides a precarious existence at best. And yet, with enormous Government assistance, the savings industry is busy selling security, not risk, to its clients. Continuing to subsidise this situation in the present circumstances, must be mad. Unless a fundamental reform is carried out in this area, it is to be doubted whether the growth in new industry on which ultimately the future depends can actually happen. Clearly, from the measures which the Government has already taken in the field of small companies and venture capital, this is a consideration which they appreciate. Why then doesn't Sir Geoffrey Howe start work now on a complete reform in this area which he could briog in with his Spring budget of 1982, ,thereby laying at least one political plank on which his party might hope to contest the next General Election?
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