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TAXING RECOVERY
The shifting of the Budget from March to November means the lobbying season for what it should or should not include is under way. With the last Finance Bill only having just passed through parliament, the arguments presented now about what Should be in the next are identical to those used in attempts to influence Mr Norman Lamont last winter. The tactics the Trea- sury is deploying are the same too: a series of leaks suggesting ever more drastic mea- sures, in the hope that when less drastic ones appear on 30 November they can be Presented as a political triumph. Beneath all the posturing, the fundamental points are straightforward. The state is still living grievously beyond its means, and if public Spending is not controlled taxes must rise.
As we argued in vain before the last Bud- get, raising taxes as the country is struggling out of recession should not be an option. Mr Lamont sought to have his cake and eat It, promising £17.5 billion in higher taxes but postponing implementation until next Year and the year after. The electorate was unimpressed. The threat of a two-stage rise in domestic fuel prices by imposing 8 per cent VAT next April and the full 17.5 per cent in 1995 was a prime contribution to the Tory candidate's humiliating defeat in the Christchurch by-election. There are strong practical reasons for not raising either direct or indirect taxes. Such rises suppress demand and therefore recovery, and even indirect tax increases do not always raise more revenue. There are also Purely political reasons to avoid rises. Mr Clarke, the Chancellor, who has his own and his party's future to think about, must Ponder these very carefully too. In its latest economic programme, unveiled this week, Labour seeks to re- package itself as a party against high taxes. But since it shows little sign of being against high spending, its promises of low taxation are incredible. However, the Tories no longer have the weapon of branding Labour the party of high taxation; Mr Lamont's last Budget saw to that. Never mind the Tory rhetoric; the Tory record itself is now suspect. There may be worse to Come. If the latest Treasury leak — a threat to abolish the upper earnings limit on National Insurance Contributions — is
grounded in fact, the Government risks making a mistake of the order of one that helped lose Labour the last election. NICs are, de facto, direct taxes; to remove the ceiling would mean a direct tax increase of 10 pence in the pound for everyone earning over £21,000 a year. Nothing could better symbolise the iniquity of taxing in order to spend; the productive private sector is soaked to pay for the unproductive public sector. The incentive to create wealth need- ed to provide essential public services is thereby diminished.
Any steps the Government takes to cut spending would also encourage recovery by leaving more disposable income in private hands and taking pressure off interest rates. No tax increases should then be necessary.
The continued growth in retail sales (they have just risen for the seventh successive month) gives the Treasury more income from indirect taxes; falls in unemployment create more taxpayers, and give savings on social security. The Budget deficit, though, still remains alarmingly high. Some opti- mists in the Treasury speak of the deficit being revised downwards from £50 billion to perhaps £45 billion as a result of the recovery. This week's Public Sector Bor- rowing Requirement figures, showing £14.9 billion borrowed in the first four months of the financial year, indeed suggest there may be an improvement, but only a small one.
To raise taxes would be to admit failure to cut spending. As Dr Madsen Pine wrote in The Spectator a fortnight ago, the way to save money is to address properly the prob- lem of public-sector overmanning. In the National Health Service, for example, over 70 per cent of resources go on pay. A recent study by Professor Eric Caines, a former director of NHS personnel, suggest- ed the health service could shed a fifth of its employees if it were run efficiently. Expropriating more money in tax from what is left of the productive economy is bad enough. Doing it to avoid bringing the public services under control is inexcusable.
Mrs Thatcher was, though, nearly as bad. Under her, Britons paid more tax in real terms, and public spending grew as a pro- portion of gross domestic product. Howev- er, so great were real increases in wealth that the higher tax take was achieved with lower direct taxes. Mr Major's position is not so fortunate. He may seek to take more in taxes from those who feel they have little more to give, and may be minded to do it by means that dampen economic activity.
Mr Major has implied he would like to create an age that, unlike his predecessor's, really is golden. To do this, he must encour- age general wealth creation, and that requires a balanced Budget that taxes and spends as little as possible. One that taxes and spends highly bleeds British enterprise, reduces competitiveness, and make Britain less attractive to overseas investors. If the Prime Minister and his Chancellor ignore this, they will consign themselves, their party and, most important, their country to still harder times ahead.
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