Budget wasn't business-friendly enough

21 Mar 12
Richard Wellings

Cutting the 50p top tax rate made sense. But the Budget should have done more to encourage wealth creation and resist the politics of envy

The politics of envy have returned to Britain with a vengeance. The role of the financial sector in the recent crisis has been transformed into a bitter resentment of the wealthy – a trend that many politicians have exploited.

In some ways George Osborne did well to resist the pressure to soak the rich. He took the courageous step of reducing the 50% income-tax rate for high earners to 45%. Most economists have long argued that such a high rate is counterproductive. In the longer term it actually reduces revenues by deterring effort and encouraging avoidance strategies. Talented individuals - and the firms that wish to employ them – are also deterred from locating in the UK.

While the cut in income tax was a welcome victory for economic logic, there were other measures that are likely to do significant damage. The hikes in stamp duty for properties worth over £2 million send out a very negative message for wealthy individuals thinking of settling and basing their businesses in Britain. Entrepreneurship is a key engine of economic growth and produces the innovations that improve living standards across the board. But if entrepreneurs find themselves targeted by special taxes imposed by predatory governments they are likely to conduct their activities elsewhere. The UK should welcome wealth creators rather than driving them away.

A similar argument applies to the banks, particularly given the importance of the financial sector to the economy. While there is strong case for reforming the banking system in the long term – to avoid further costly bailouts - the imposition of special levies threatens to drive business away and reduce the overall tax take.

The efforts to clamp down on tax avoidance are also likely to be counterproductive. Businesses already spend huge sums complying with hugely complex tax regulations. Armies of highly paid accountants and lawyers are employed. The best way to reduce avoidance is to lower tax rates and simplify the system. The Chancellor introduced some welcome policies to simplify tax for very small businesses, but his focus on anti-avoidance measures threatens to increase complexity for larger firms.

George Osborne did at least recognise that tax and other regulations represented a severe burden on businesses. However, there was no systematic attempt to reduce regulation. The lack of action on employment law was particularly disappointing. The abolition of the minimum wage, for example, could produce a big reduction in youth unemployment. At least there was action to liberalise Britain’s ultra-strict planning rules. If implemented correctly, this will make it much easier for businesses to expand and will also help mitigate the shortage of housing in the South-East. But this was just one example of significant deregulation when there should have been many. The government has failed to recognise the degree to which red tape is suffocating growth.

And it’s important to recognise that economic recovery is at the heart of the Chancellor’s deficit reduction plan. He is largely relying on increases in tax revenues rather than spending cuts to move closer to balancing the books. But these plans could easily be blown off course.

At 8.3% of GDP in this financial year, the budget deficit remains at dangerous levels – higher than in crisis-hit Spain and Italy. If the robust medium-term growth predicted by the Office for Budget Responsibility fails to materialise, government borrowing will remain stubbornly high. The fallout from the eurozone crisis, higher oil prices and the hangover from the banking crisis are all likely to have a poisonous effect on the British economy. A more responsible Chancellor would therefore have taken a more cautious approach to the public finances in anticipation of trouble ahead. At the very least, planned increases in government spending should have been cancelled, starting with foreign aid.

Dr Richard Wellings is deputy editorial director at the Institute of Economic Affairs 



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