On Budget

My response to the 2024 budget statement

Budgets, according to least two political podcasts over the last week act as a wonderful energy booster for the party in power, only to lose their power as people digest their contradictions, assumptions, and consequences . Last week’s budget statement by Chancellor of the Exchequer Jeremy Hunt seems though to have caused little excitement and some consternation, both derided as an over-leaked damp squib, and for its subtext of cutting and then slowly abolishing National Insurance hinting at the creeping abolition of state pensions.

One particular contradiction caught my ear. Just before announcing the cut in National Insurance, Hunt pointed to the injustice that employment income is taxed twice – NI plus income tax – while income from other sources is taxed once. The government’s solution to this injustice – to reduce, and eventually abolish altogether, NI – doesn’t address the injustice that dividends and capital gains are taxed at a lower rate than income. Indeed, Hunt decided to reduce capital gains tax on selling second homes from 28% to 24%, entrenching this injustice further. The argument is that this would increase revenue by encouraging such transactions. But for a government that claims it wants to reform housing in renter’s favour – ending no-fault evictions is a policy promise by this government, albeit one they have yet to implement – this reform may well encourage evictions as property owners seek to take advantage. It’s a measure that benefits the property wealthy while potentially making things worse for renters.

There are a couple of measures which tax wealth and capital in this budget. Firstly, the existing temporary windfall tax on oil and gas companies’ profits was extended, despite opposition from Scottish Tories.Secondly, Hunt abolished “non-dom” tax status, potentially raising revenue from overseas income earned by those resident in the UK. As has been widely commented, this measure is really a trap for Labour, who were planning a similar move to fund increases in health and education spends. Hunt instead has used it to fund his NI reductions, which Labour have pledged to keep, meaning they will have to find other ways to fund their commitments.

One obvious measure would be to increase capital gains tax. I hope Labour are planning such a move, and there are good reasons why it would be unwise to announce such a policy before entering government. Those with unrealised capital gains would simply sell before the election, effectively dodging the tax for the year. There’s a good summary of the arguments in favour of increasing capital gains tax, along the lines favoured by Tory tax-cutting hero Chancellor of the Thatcher years, Nigel Lawson, over at Dan Neidle’s Tax Policy Associates.

The reduction in NI doesn’t begin to compensate for what’s called “fiscal drag” – the stealth tax caused by the freezing of income tax thresholds at 2022 levels. Taking inflation and wage rises into account, more and more low-earners become income tax payers, increasing tax revenue by some £41bn according to the Guardian.

Hunt also extended what was supposed to be a temporary cut in fuel duty introduced two years ago by Sunak, meaning fuel duty has not risen with inflation since 2011. Again this is something Labour promise not to undo, although Labour leader Starmer did at least point out in his response that the Government could be doing more to see the reduction is in fact passed on to buyers at the pump. There’s little evidence this cut has benefited anyone. The RAC’s head of policy Simon Williams, quoted in The Mirror argues motorists have not “fully benefited from the cut that was introduced just two years ago due to retailers upping margins”. So we have a policy that might encourage fuel use, increasing illnesses from air pollution, and thus the burden on the NHS, without much appreciable benefit to motorists’ bills.

Overall then, this budget adds up to not very much, and is expected to require, especially taking into account the stated aim to abolish NI in the next Parliament, new cuts to public spending. These will fall on non-ringfenced spending in areas like local government and prisons, two parts of the public realm which are already deep underwater, local government facing effective bankruptcy across the country, and deaths and self-harm amongst prisoners on the rise. A false economy.

What would I do differently?

It’s all very well me criticising. You may feel entitled to ask if I have any better ideas. Fortunately I do. Bearing in mind I don’t have a squadron of civil servants to help me work out the fine details, if I were Chancellor, I would be broadly outlining the following.

A Budget Statement by Korvin M

Firstly, I think it’s important to discriminate between short term and long term policies. In other words, there are measures that I would take immediately, and then there is the situation I would like to get to over the course of a Parliament, ie. in five years time. I’ll address both in my remarks.

Value Added Tax

At 20%, VAT is at a historically high rate. With inflation having risen, the revenues from this consumption tax have also risen, although this is offset by a reduction in spending on luxuries during periods of high inflation. Nevertheless, it’s my belief that there’s both a fiscal and a moral case for reducing VAT when inflation is high. Although inflation has halved over the twelve months, I think this is transitory and inflation will start to creep up again by this time next year. I will therefore reduce VAT by 1%, taking it down to 19%. I plan further reductions in future years, with the aim of getting the standard rate down to 15% or less in five years time. This will help not only retail consumers but also business, by reducing the cost of web hosting and other taxable spends, making the taxable services offered by businesses more affordable.

I am implementing some immediate reforms to VAT. I will abolish the zero-rating, and simply move all zero-rated goods and services into the VAT-exempt category. I am also introducing a new intermediate rate of VAT, initially at 12.5%, enabling governments finer-grained discrimination when taxing different goods and services. Non-dairy chocolate, as a ‘feel good’ measure, will be taxed at the intermediate rate, as will bottled water, representing a large VAT cut on those products. Labour’s proposal to abolish VAT exemption for fee-paying private schools seems sensible, and I will adopt it, but initially at the reduced rate of 5%, to allow schools and the families that use them time to adjust over the next financial year. In future years private education will be subject to the 12.5% intermediate rate. This will increase VAT revenues and fund improvements in general education, including adult education.

Income and Capital Gains Tax

Income tax was first introduced in the late 1790s to fund the wars with France that became known as the Napoleonic Wars. Despite the threat from Bonaparte having receded somewhat since then, our country today faces a difficult world environment, with reductions in growth and investment as a result of leaving the European Union. So I don’t propose any changes to rates of income tax at present. There isn’t much headroom to work with if we are to maintain fiscal rules on debt. However, over five years I will aspire to bring the basic and higher rates of income tax down to 15% and 35% respectively, while leaving the additional rate where it is at 45%. These would apply in England and Wales only, income tax in Scotland being in the gift of the Scottish government.

But fiscal drag caused by the freezing of income tax thresholds needs looking at again. These freezes were put in place after the thresholds were generously raised by George Osborne and his successors between 2011 and 2019, with the personal allowance currently at £12,570. Freezing them in 2022 may have seemed sensible at the time, but failed to anticipate such sharp rises in inflation and wages. I shall therefore unfreeze the lower threshold. Over five years, I want the personal allowance to rise to at least £14,733, which is the current basic rate threshold in Scotland. This year I will increase the personal allowance by a small amount – £205 – taking the personal allowance up to £12,775. I don’t propose at this stage to increase the higher rate threshold from its current level of £50,271, although I don’t rule out increasing this threshold in future years. While this is a small, almost symbolic increase, it indicates my desired direction of travel, and is a real if modest tax cut for all income tax payers, including those in Scotland. And it will remove the need to pay income tax from some people altogether.

These short term measures will have to be paid for in the short term unless we want to increase borrowing or cut spending, neither of which are attractive options. I therefore propose to increase capital gains tax. I will increase the basic rate to 12% and the higher rate to 24%. To protect some smaller investors however, I will raise the threshold at which capital gains tax is levied to £12,775, in line with the personal allowance.

In the long term, the aim is to fully harmonise income and capital gains tax. In five years time, I hope the basic and higher rate of both these taxes will be 15% and 35% respectively. Taxing capital gains at a lower rate than earned income is simply unfair on workers, and encourages tax avoidance. Harmonising these taxes will discourage people to convert earned income into capital as a way of avoiding income tax, and instead make the decision to earn income through employment or capital a neutral one for the taxpayer according to their opportunities and preferences.

In the absence of any immediate cuts in National Insurance, abolition of the so-called “non-dom” tax arrangements will be used to fund investment in health and education along lines currently proposed by Labour.

Corporate Profits

Corporation tax is currently at a historically high level, by post-1997 standards, following the global effort led by President Biden to set a global minimum for corporation tax, to discourage capital flight from high corporation tax regimes. We do want to encourage growth and investments, but there is an urgent need to fund injections of cash into public services. Therefore, I shall increase both the small companies and main rate by 1%, taking them to 20% and 26% respectively. Existing corporation tax relief for companies that reinvest their profits in their companies shall be retained in principle. Such relief promotes growth, as well as potentially improving working conditions. I shall institute a review of this system however, to ensure that tax relief on reinvested profits genuinely benefits workers and the wider economy.

I will extend the existing temporary windfall tax on oil and gas companies’ profits, and close any loopholes. Additionally a new temporary windfall tax shall be levied on privatised utility companies profits for the next financial year. However, significant reductions will apply to ecologically friendly energy companies, energy efficiency through new technology investments, and to companies who undertake remedial action to clean and reduce sewage damage to our waterways.

Certain online companies profited greatly from the response to Covid-19 and the shift to online work and play. A one off windfall tax on these companies will be levied, funding relief for the NHS as well as improving air quality in public buildings.

Fuel duty and improving transport

I shall also unfreeze fuel duty, reversing the 5p cut implemented in 2022. This will raise duty on unleaded petrol to 58p per litre. While I accept this will be difficult for motorists, it is intended to help invest in and encourage journeys by less polluting methods, such as bus, rail, or bike. Reducing air pollution, increasing the quality of life for all, and reducing traffic congestion, will improve motorists journey times, saving actual fuel consumption. There’s no war on motorists but we are waging war on air pollution, and we must win. Investing in public transport is essential if we are to avoid ecological dystopia.

In total these targeted tax rises can fund immediate, urgent relief for public services as well as my immediate if modest tax cuts.

Proposals For Growth

So much for immediate changes in tax rates. There is a broad consensus that we need a growth plan. Some of the growth policies of the Corbyn/McDonnell leadership of the Labour Party need looking again. The distinguished economic historian Robert Skidelsky argued their proposal to create a National Investment Bank was “neither extreme nor new” , pointing to Nordic success, and concluded the proposal fulfils the state responsibility to invest and encourage growth, leveraging so-called ‘idle bonds’ for infrastructure development.

Sidelsky was also in theory enthusiastic about the Corbynomic proposal for “people’s quantitative easing”, which he rechristened unorthodox QE. Instead of printing money against government securities, which Sildesky argues merely fuels speculative bubbles, unorthodox QE distributes newly printed money directly to housing associations, councils, and to national and local investment banks. Sildesky argues this approach is reputable, but that there’s simply no need for it when the economy is growing and interest rates are low. These were the conditions when Corbyn proposed it, rendering the policy superfluous and potentially inflationary in his day. Perhaps though he was ahead of his time: we are currently in recession or no/low growth territory, and borrowing, even for investment, is constrained by high interest rates. Under these conditions, a modest unorthodox QE pilot will be implemented in this forthcoming financial year, in consultation with the Bank of England. The pilot money will fund emergency relief for local councils under threat of or already under section 114 notices, ringfenced around protecting statuary social services for children and adults, youth services, and libraries, al of which I regard as investments in the future. Its effects will be monitored closely, and the programme discontinued as soon as we return to sustained growth and lower interest rates.

A plan for a Land Value Tax

Beyond these measure for growth, how shall we pay for my proposed long term deeper cuts to income tax and VAT, taxes which between them account for 44% of government revenue? The 19th century American economist Henry George argued that taxing the unimproved value of land could recapture some of the lost value of what was, during the majority pre-agricultural phase of human existence, a common inheritance and responsibility. As one traveller punk band put it, it is the land that feeds our children; you cannot own the land: the land owns us. George proposed taxation of land value as a pragmatic, we would now say centrist, alternative to nationalising land, which he viewed as unworkable.

Taxing the unimproved value of land, otherwise known as ground rent, allows by all means private ownership of land. It simply attaches greater collective responsibilities to that undertaking. It discourages speculation and encourages productive use of land. George saw an ethical imperative for taxing ground rent. Landowners, ipso facto, do not contribute to any rise in the value of their land. Rather, the value appreciates thanks to the efforts of the community, including the state and local residents, and the wider private and third sectors, in investing in and improving the general area, its facilities and amenities. Therefore it is inequitable and unjust for landowners to profit from speculation alone.

Georgists propose a high rate of Land Value Tax (LVT) would be fair, easy to collect, difficult to avoid or evade, and perhaps the most re-distributive form of tax possible. It is in fact a form of wealth tax, but one which encourages productivity, investment, and sustainable growth.

Adam Smith in The Wealth of Nations argued “ground-rents are a still more proper subject of taxation than the rent of houses” and first put forward the argument that they would not cause a rise in rents, since the supply and demand of land would not change. Moreover, LVT could increase the supply of rental properties and thus promote competition amongst landlords to attract tenants. A land value tax was proposed by British Prime Ministers Lloyd George and Asquith, as well as by Churchill as a young man. It was in the 1931 Labour budget but was repealed by the incoming National coalition government. Labour reintroduced a form of LVT in 1947, but again this was repealed by the successor administration.

More recent work has established the efficiency of LVT in practice. Jeffery Smith and Fred Foldvary observe how LVT encourages investment in inner cities, reducing urban sprawl. Harrisburg, Pennsylvania, which has operated LVT since 1975, observes just these effects, reducing empty properties in the centre considerably.

Introducing LVT in the UK is a huge task, requiring new valuations of land. Advocates argue for LVT as a replacement tax, not an additional tax. LVT is often proposed as a replacement for Council Tax.

Dan Beiny recently argued emphatically in Prospect that this plan cannot possibly work: amongst other problems, Council Tax bands and rates are so out of date they bear no relationship to the living market. Beiny argues instead LVT ought to be introduced as a new tax, at least initially. If successful, it could offset other taxes considerably, including Council Tax. If set at a high enough rate (which is advisable if it is to have its intended effects) it could, alongside progressive rises in capital gains tax, offset reductions in income tax and VAT. But such a seismic change must be implemented carefully.

My proposal is to empower the Combined Authorities of England, including the Greater London Authority, to pilot LVT in their areas. This will enable local participation and accountability in this huge effort, but over a wide enough area to maximise an equitable distribution of revenue. The devolved governments of Scotland, Northern Ireland and Wales will also be empowered to explore their own options for an LVT policy. The work to establish this new form of taxation for the UK will be carried out in consultation with the devolved and local authorities, with Parliament and with the people. I do not propose details, but set an overall aim for a workable LVT which can fulfil its advocated role as a replacement tax, taking over an increasing share of the overall tax burden. However I would propose reductions or credits for land owned as a primary residence, as well as for good stewardship that preserves wilderness and bio-diversity.

Summary

This budget addresses immediate problems facing the economy and country, and establishes a direction of travel for longer term tax reform. I’ve also outlined a solid plan for growth and future tax cuts, alongside restarting a stalled and overdue revolution in how we tax land, in consultation with the new devolved landscape of Britain and Northern Ireland. This is only the beginning of a journey. It represents one contribution to setting our collective sights towards a UK that can be financially stronger and more equitable.

The featured image for this post was adapted from a photograph by Ted Eytan under the terms of the its license. . The background image of the Gladstone Budget box is from HM Treasury under the terms of its licence.

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