A crowded field but where is the quality?
They say that fact is stranger than fiction and nowhere is
this more true than in British politics right now. Thirty years ago, the TV
scriptwriters Laurence Marks and Maurice Gran satirised the Conservative Party
of the 1980s in the TV sitcom The New Statesman.
It was based around the fictional hard-right Tory MP, Alan B’Stard, who was
portrayed as an unscrupulous, amoral individual who would stop at nothing to
fulfil his ambitions. It is difficult to watch this clip and avoid the impression that many of the current candidates for the Tory leadership
are aping B’Stard’s fictional rhetoric.
Nominations for the Conservative Party leadership closed
today, with 10 candidates on the ballot paper and with the first round of voting due to take place on Thursday. Just as a reminder
of what is at stake, 314 Tory MPs are due to choose two candidates to succeed
Theresa May who will then face a ballot of all Party members. What this means
is that 124,000 people will choose the person who will attempt to negotiate the
UK’s departure from the EU. Or, to put it another way, this choice will be made
by 0.27% of the total electorate. Moreover, if only one candidate emerges from
the parliamentary process, as happened in 2016, the new PM will be chose by
less than 0.01% of all eligible voters[1].
To highlight the New Statesman-like surrealism of the debate, three of the
candidates (Rory Stewart,
Andrea Leadsom and Michael Gove)
have all admitted to past drugs misdemeanours. Two of the hardline Brexiteer
candidates (Dominic Raab and Esther McVey)
have suggested suspending parliament to ensure that it cannot block Brexit on
31 October. And this is before we get to Boris Johnson whose strained relationship with the truth is legendary.
Welcome to democracy in 21st century Britain.
Reviewing the fiscal options
But for all the lack of quality on display to inherit the
office held by substantial politicians such as Winston Churchill and Margaret
Thatcher, the economic issue of interest concerns the fiscal policy options suggested
by the candidates. Let’s start with Boris Johnson. He has already threatened to
withhold the £39 billion payment for incurred liabilities unless the EU gives
the UK better exit terms. But assuming this is paid over a period of 3 years,
it only amounts to around 10% of the EU’s annual budget revenues (or 0.1% of EU
GDP). Not only is it a trifling sum in the grand scheme of things but lawyers
suggest that such a move is probably illegal. It would also be the first time
since the UK came into existence following the Act of Union in 1707 that it has
defaulted on its credit obligations. The EU simply will not be threatened in
this way and it would cost the UK far more than it gains. Whilst such a policy
may play well with the Tory faithful, it would be an act of monumental economic
stupidity.
Various leadership candidates have also promised tax cuts in
the event they accede to 10 Downing Street. Johnson has promised to raise the
threshold for the higher rate of income tax (40%) from a starting salary of
£50,000 to £80,000, at an estimated cost of £10 bn (around 0.5% of GDP).
Johnson claims that this can be funded from the £26.6 bn set aside by the
Treasury as an insurance fund against a no-deal Brexit. But since Johnson
has threatened that the UK would be prepared to walk away from the EU without a deal,
he is surely going to need the emergency fund. Johnson’s team counter that the
policy would be part funded by raising the upper limit on national insurance
contributions. However, the Institute for Fiscal Studies has pointed out that
this would benefit richer pensioners who do not pay NICs – which, oddly enough,
maps onto the Conservative Party membership demographic.
Meanwhile, Brexiteer Dominic Raab has suggested reducing the
basic rate of income tax by 5 percentage points over a period of five years. A
rough rule of thumb based on Treasury calculations suggests that this will
reduce revenues by more than 1% of GDP on a five-year horizon with no
suggestion of how this will be funded. Foreign Secretary Jeremy Hunt, who is
also in the running, has called for a huge increase in defence spending to “support our great ally, the United States.”
Currently, the UK spends around 2% of GDP on defence – each one percentage
point increase will raise outlays by £20 bn. Maybe former Health Secretary Hunt
thinks he can find more for defence by taking something away from the health
budget or perhaps in contrast to his rivals, he believes taxes should be
raised. But like his rivals, he has failed to set out how his plans will be
funded.
We should also not forget Michael Gove’s plan to abolish VAT
and replace it with a lower, simpler sales tax. Interesting theory but a bad
policy. For one thing, it is one of the government’s biggest revenue
generators, delivering £138 bn per year to the Exchequer (6.3% of GDP). Moreover
it is a general tax involving the production and distribution of goods and the
provision of services, and whilst it is borne by the final consumer it is more
than simply a sales tax. VAT is also efficient, in contrast to Purchase Tax
which it replaced and which was levied on a range of goods at differing rates.
It was certainly not efficient. If Gove’s proposed tax is “simple” it will have
to be applied to a wide range of goods in order to generate the kind of revenue
that VAT does currently, which raises questions of whether items such as food
will remain exempt.
Then there is the question of how it impacts on the supply
chain. If it is levied at every stage of the process, a “simple” 5% rate on a
chain with five links results in a 27% tax rate compared to the current VAT
rate of 20%. Moreover, if an exporter is the final link in the chain they will
not be able to recoup the tax paid without raising their international selling
price, which would render their product uncompetitive. In short, switching away
from VAT would involve far more complexity than Gove believes. A simpler tax
which is revenue neutral would require a lot of thought and would almost
certainly prove impossible to implement before the next election. There is a
reason why 166 of 213 UN members have adopted VAT and why India has just rolled
it out. It is simple and more efficient than the alternatives.
The fact that the Tory front-runners have made taxation such
a big part of their leadership bids reflects the lack of new ideas coming from
the political right. Reducing direct taxes worked in the 1980s because previous
levels of tax were too high so there were some incentive effects derived from cuts.
In addition, there was a large rise in female labour force participation which
helped swell income tax coffers. However, the UK did not face the problem of an
ageing society which it does today. As a consequence the UK does not have the
same scope to cut taxes without major consequences for future public
liabilities. Having endured nine years of austerity to bring public finances
back into line, it would be fiscally irresponsible to waste all the hard work on
unfunded tax cuts which benefit particular interest groups simply to win the
race for Number 10.
[1] Admittedly,
voters do not vote for the PM directly since they only get to choose their
local representative. But there is no doubt that their local choices are
determined by national level issues.
No comments:
Post a Comment