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What The Budget Should Have Said

April 5, 2007

What The Budget Should Have Said

No one likes paying tax. Nevertheless we all recognise that creating a civilised society and being able to reap the benefits of community life costs money. Inevitably much of the media attention of this year’s budget focussed on the headline reduction of the basic rate of income tax ? a tax cut, let…

What The Budget Should Have Said

No one likes paying tax. Nevertheless we all recognise that creating a civilised society and being able to reap the benefits of community life costs money.

Inevitably much of the media attention of this year’s budget focussed on the headline reduction of the basic rate of income tax ? a tax cut, let’s not forget, which only takes effect in April 2008. Less attention was paid to the fact that the abolition of the ten percent income tax band means that the very lowest paid in our community are now expected to pay even more of their income in taxation. True, those in work will be able to access the benefits system to claim additional working tax credit. But this system is very complex. It is difficult for anyone ? even legislators such as me ? to comprehend it fully: there are thousands of pages of legislation, backed up by umpteen forms, classes, groupings and exemptions. The fact is that the tax credits system is now so complicated that many people do not even bother to claim what is their due. Indeed this is fully recognised by the government ? it anticipates a take-up rate of about sixty percent only in making its calculations on the amount of money it expects to spend each year on tax credits.

As a former businessman, I have always been committed to the competitive lowering of rates of business and personal taxation. Naturally this applies not only to the business fraternity but also to the levels of income tax, especially those paid by the lowest earners. Indeed I believe that far more attention now needs to be directed on the lowest paid in our communities. I should like to see those earning below the average weekly wage pay far less in income tax. At the moment you barely have to earn £100 per week in order to start paying income tax. As we all know, especially here in central London, you need to earn considerably more than that simply to keep your head above water.

I recognise that the government has a genuine commitment to alleviating poverty. However, there is now an entrenched underclass earning so little that over two million of the lowest earners in our communities pay marginal rates of tax between sixty and ninety percent. In effect, if you are working a thirty-five hour week then you have to be earning less than half of the minimum wage before you start paying income tax. Although the lowest paid in the workforce qualify for working tax credits, this seems a ludicrously inefficient way of shuffling money from one government department to another. All this must stop.

I should prefer to see a system whereby no one earning less than £200 per week pays any income tax at all. Similarly by raising slightly the tax bands of those earning in excess of (say) £40 000 per annum, the better-off in our society would not benefit from the extension of the zero rating.

Here in London we all know that many people working in catering, cleaning and hospitality services barely earn enough to live on. A wage of £200 per week for such essential workers should be the absolute minimum before the State begins to take their money away from them in tax. I very much hope that it will be my Party’s policy in the years ahead to focus far more attention upon those in our communities who find themselves trapped in the income tax system.

Meanwhile, at the other end of the equation, we are collectively as a nation currently spending far too much and well beyond our means. Even taking account of the Chancellor’s intention to put a break on public spending in the years ahead, he still anticipates an annual debt of around £35 billion for each of the next four years. Trouble is that although many of his growth figures have proved correct in the past, he has almost always erred on the side of optimism when it comes to projections as to the national debt. In short we are quite likely to be borrowing considerably more than this in the next few years ? and remember, even these statistics are based on projections for growth in the economy that may prove to be wildly optimistic going forward. I fear that some of the fundamentals in our economy do not look anything like as rosy as they did a decade ago.

I have spoken several times in Parliament concerning the large debts we are running up in relation to the private finance initiative (PFI), all of which will have to be paid in the future. Whilst the government has allowed an almost unprecedented level of school and hospital building, it is incontrovertible that the explosion in PFI projects will vary from bad to appallingly bad value for the taxpayer. This is in part due to the large numbers of private sector operators, contractors, consultants, lawyers and accountants who have climbed aboard the extremely lucrative PFI gravy train.

In the same way that privatisation under Conservative governments in the 1980s and 1990s proved irreversible, so too will PFI. In many ways, from the Labour Party’s point of view, that is the great genius of the vast expansion of such projects that has taken place since it came to office. The cost that the taxpayer will have to meet in the future for PFI projects agreed now, will amount to an ongoing additional burden on public expenditure over the next twenty five years or so. The room for manoeuvre for any future Conservative government in public expenditure and taxation will therefore be considerably limited.

I fear that this off-balance-sheet financing is delaying some of the tough decisions that need to be made about the future of public spending. It also delays our debate about the way in which we will need to manage public services in the future to delivery equity and social cohesion, as well as to provide for the vulnerable and voiceless in our society. One of the more depressing prospects in the years ahead is that my generation will be seen as having had it easy, and I fear that this era will be seen as the best of times.

Simply put, we are living beyond our means and this year’s budget has done nothing to put this right.