Sunday, March 20, 2011
Osborne must send a signal on the 50% rate
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular piece is available to subscribers on www.thesundaytimes.co.uk - this is an excerpt.

George Osborne's second budget, on Wednesday, is likely to be something of a non-event in macroeconomic terms. The emergency budget in June last year set the tax course for 2-3 years, if not the parliament, while October’s comprehensive spending review did that on the public expenditure side.

Though the public finances have improved, and should undershoot the Office for Budget Responsibility’s predictions for 2010-11, there is no room for any significant giveaway beyond fuel duty.

So attention will be on what some officials call the chancellor’s “big bang”, the growth review originally planned for last autumn to be published this week. The fiscal squeeze will impact on the demand side of the economy; the aim of the growth review is to boost the supply side.

You could be forgiven a sense of deja vu. Every government has a growth strategy. John Major’s used to publish a competitiveness white paper each year. Gordon Brown had his productivity agenda.

There are two things about supply-side reforms. One is that their effects take time. The Thatcher labour market reforms of the 1980s did not really bear fruit until the 1990s. They do not offer a quick fix.

The other is that there are few new ideas under the sun, hence Osborne’s decision to give the 30-year old enterprise zone idea another outing. Supply-side reforms mean improving education, skills and training; cutting red tape; easing planning constraints; fostering investment and innovation, and improving infrastructure. Crack those and you have a growth strategy.

There will be a lot of that this week. The chancellor is preparing for a partial u-turn on planning. Housebuilders have been vocal condemning the Tory localist planning agenda as a Nimby (not in my back yard) charter, which will hit already extremely low housebuilding. The industry will welcome this but also say it needs improved mortgage availability.

The Organisation for Economic Co-operation and Development (OECD) was in London last week, celebrating its 50th anniversary. Its survey of Britain urged a shake-up of property taxes - replace stamp duty and council tax with one tax on property value - and only a gradual rise in interest rates from mid-year. It also said, within a fiscal tightening it supports, the government has to ensure the tax system remains competitive.

This is happening for corporation tax, which is on course to be cut to 24%, from the 28% the coalition inherited. It is not happening, as yet, for income tax. And if there is one thing that Osborne could do to persuade business, particularly internationally mobile larger firms, that it is serious about fostering enterprise, it would be to signal his intent to get rid of the 50% top rate of income tax.

The 50% tax on incomes above £150,000, coupled with the withdrawal of the personal tax allowance above £100,000, were the poison pills left by Labour. If you make a lot of money in Britain, you will be hit with a marginal tax rate of 52% (including National Insurance). The government will take more than half of every extra £1 but, thanks to the deterrent effects of the tax on mobile workers, raise little extra revenue.

Removing the personal allowance gives a marginal tax rate from next month of 62% on incomes from £100,000 to nearly £115,000. Not only is this very messy but it destroys incentives. The Institute of Directors last week called for both to be abolished, with a target of 2014-15 for getting rid of the 50% top rate. Sir Richard Lambert, no right-wing firebrand, used his last speech as CBI director-general to urge the government to signal the eventual abolition of the 50% top rate.

The politics of this are, of course, pretty awful. The budget is sandwiched between January’s Vat increase and next months 1% NI rise. Labour’s two Eds, Balls and Miliband, are calling for a re-run of the one-off windfall tax on bankers’ bonuses and Balls would start the 50% rate at £100,000, not abolish it. Any pledge to abolish it would be castigated as helping bankers and the very rich, while everybody else suffers. The Liberal Democrats would hate it.

Sometimes, however, politicians have to be brave. The Tories lost out on tax in the coalition deal, being forced into a hike in capital gains tax and having to abandon their planned cut in inheritance tax.

We have had tax pledges before, notably the one to cut the basic rate of income tax to 25% in the 1980s. This government has such a pledge, aimed at those on lower incomes, of raising the personal tax alllowance to £10,000.

It is too much to ask that Osborne names a date for abolishing the 50% rate. That would offer too many hostages too fortune. It is not too much to ask that he sets a direction of travel, saying that he intends to get rid of Labour’s politically-motivated tax hike during his tenure as chancellor. Business needs a signal, a light at the end of the tunnel. Otherwise the growth strategy will fall on stony ground.