Some strategic thoughts for the Autumn Statement and beyond
December 1, 2014
One of the great paradoxes of this strangest of political times is that sustained growth and clear signs of domestic recovery have made the economy a less salient issue to voters. It is almost as if these upward trends are now being taken for granted by voters unaware of the hardship and challenges that continue to lie ahead.
Perversely, in the circumstances, perhaps only renewed economic turmoil will persuade the voters that the prospect of Labour’s return to office is a risk too great to bear. As David Cameron wisely warned a fortnight ago at the Brisbane G20, global instability and uncertainty make it clear that we cannot detach ourselves from the gathering international economic storms.
Indeed George Osborne’s single biggest achievement of these past four-and-a-half years has been to continue to convince the markets that we have a workable plan. Market confidence would in all likelihood collapse if a Labour-led government emerges in May: a run on sterling and markedly higher borrowing costs would follow.
However our delivery of this message has been impeded in part by the fact that the coalition may inadvertently have prepared the ground for some of the damaging policies that the Labour Party might in government wish to implement. This makes the tone of this Autumn Statement even more important than usual.
There are inevitably times when short term political expediency trumps principle. A politician would have to be in denial to suggest otherwise. But sometimes the coalition has sacrificed principle either to stave off immediate criticism or to rob Labour of the initiative by adopting its interventionist rhetoric.
Let us take this year’s Finance Act as an example. At a time when the government was vocally celebrating the imminent 800 year anniversary of the Magna Carta, it oversaw the passage of legislation that permits Her Majesty’s Revenue & Customs (HMRC) to confiscate a citizen’s property before the courts have established who is legitimately entitled to it, via the innocuously-named Accelerated Payments Regime. This essentially provides a mechanism for retrospective taxation of the sort we were so up in arms about recently when the UK was presented with an unprecedented £1.7 billion EU budget adjustment.
It also built on foundations laid by the previous year’s legislation, under which a General Anti-Abuse Rule (GAAR) was introduced without the provision of a firm definition as to what constitutes tax abuse. This move effectively led to an unprecedented transfer of power from Parliament to HMRC, with this agency of the state now authorised not only to apply the law, but to rewrite it. If such changes had been introduced by a Labour Treasury team, Tory Shadow Ministers would have (rightly) been making a principled stand opposing such new powers.
The political thinking behind all of these moves has been clear. With Labour ratcheting up the rhetoric over tax avoidance by the super-rich and global corporations, Conservatives have needed to be on the front foot, neutralising criticism that ours is the Party that looks after its rich friends. But on what intellectually consistent basis could a future Conservative Opposition criticise a left-of-centre government that sought to take ever more draconian retrospective action against the corporations and wealthy individuals that it relishes taxing to the hilt?
We are in a similar bind over bankers’ bonuses. I appreciate that the Chancellor could not have been more robust in defending Britain’s banks from a European Union bonus cap and Financial Transactions Tax which threaten to undermine London’s global competitiveness as a financial centre. We properly make the case that the cap would only place upward pressure on base salaries, giving banks less flexibility to manage costs and making it tougher to claw back rewards in the event of failure. Yet only this spring, the Treasury was impervious to the concerns of RBS executives as it moved to block plans to give key staff bonuses, at a stroke undermining a commercial operation in which the taxpayer has a hefty stake. What is our line of attack should a putative Chancellor Balls wish to micromanage commercial decisions of this nature?
Let us look again at the Bank Levy, a tax introduced in 2011 on banks’ balance sheets to compensate taxpayers should their backing be required for any future bailout. Sensibly designed to reduce risk by encouraging banks to minimise public exposure to large balance sheets, the levy has failed to raise the targeted £2.5 billion per annum since it came into force. In truth this is a good news story – as banks have duly downsized and protected themselves against the need for a future bailout, there have been fewer assets to tax. The trouble is, the government has realised it now needs to raise the cash for both financial and political reasons. As a result, it has hiked the rate of the levy no fewer than eight times in order to hit the £2.5 billion target, creating an unstable, uncertain tax regime in this sector. It has also ensured that the levy is now considered part of the budgetary furniture to the extent that Labour plans to use it to fund future spending commitments.
When it comes to foreign investment in the UK, inconsistencies in the coalition’s avowed rhetoric give succour to interventionist voices within the Labour Party too. Take Pfizer’s takeover bid for Astra Zeneca. Labour took delight in criticising the government’s wise decision not to interfere in the abortive takeover. However rather than defend itself through careful explanation of the dangers of protectionism, the coalition instead attacked the previous Labour administration for hypocrisy, before flirting with the idea of extending the national interest test in foreign takeovers. I appreciate how politically sensitive the Pfizer deal was in some constituencies, but the government’s expedient response fundamentally undermined Conservative principles and will surely make it harder to articulate the case against an interventionist approach by a future Labour administration.
On property taxes, we have correctly launched an uncompromising attack on Labour’s plans to levy a charge on so-called ‘mansions’ priced beyond £2 million. Incidentally it seems to me that most central London Labour MPs also think the mansion tax as proposed is sheer madness! Yet by the end of its tenure the coalition will itself have ramped up taxes on that end of the market at least seven times, whether through a hike to seven per cent stamp duty at the £2 million plus level, the imposition of capital gains tax on overseas owners, or the fifteen per cent levy on empty homes owned by companies. The Treasury now raises more in stamp duty from one London borough (Kensington & Chelsea) than from Scotland, Wales and Northern Ireland combined. There is similar inconsistency when the coalition proudly contrasts its emphasis on personal responsibility to the nanny statism of the Blair-Brown era. In spite of robust encouragement of an enterprise-led, job-creating economy, the coalition has arguably helped build on Labour’s legacy by pursuing punitive regulatory policies on legitimate businesses, whether through plain packaging for cigarettes or exploring the prospect of sugar, fat and salt taxes and further advertising restrictions on junk food.
Conservatives are right to point out the very real economic threat posed by the mere prospect of a Labour administration. This must be both our primary message in the months to come, and the underlying theme to this week’s Autumn Statement. However, in truth, the job of turning the UK economy around has only just begun. It is likely that by May 2015, of the seven largest annual deficits in UK history, five will have been recorded in each of the years of the current administration whose watchword has been austerity.
We are surely mistaken to believe that the real and impending economic threat posed by a Miliband government might be politically neutralised by stealing choice items from Labour’s wardrobe. Not only will the electorate begin to question whether there is truly anything to fear from a change of administration, but if we find our opponents back in charge, we might find that some of their worst policies have our fingerprints on their foundations.