23 November 2016

There were two good ideas in the Autumn Statement


Philip Hammond, in the Autumn Statement, confirmed that the Queen will continue to pay the highest tax rate in the country, then those on the incoming Universal Credit, then the rest of us.

This is not, perhaps, quite how we should arrange a taxation system. It is, however, the one we’re going to get.

The Crown Estate will soon be paying 75 per cent of its profits to the Treasury, with 25 per cent going towards funding the expenses of the Royal Household – including, yes, those repairs to Buckingham Palace.

The Chancellor announced today that the taper rate for Universal Credit will fall to 63 per cent from the currently planned 65 per cent. This is equivalent to stating that the poor who are just rising up out of complete welfare dependency face a 63 per cent tax rate – much, much too high.

CapX readers are doubtless familiar with the Laffer Curve, the argument that as you raise taxes, revenue will at some point start to fall, because it’s just not worth people striving to earn.

The exact level of that tipping point is difficult to discern, but reasonable economists have put it at 54 per cent in a tax system like our own. This is, note, rather lower than that which applies to welfare claimants.

It’s also worth noting that with National Insurance, our top rate is around about that 54 per cent peak. If you assume that poor and rich alike are subject to the same basic influences, a tax rate that’s too high for the rich is also one that’s too high for the poor. In short, this taper rate should fall substantially.

Elsewhere in Hammond’s statement (whose full details are now online) there were, as there always are, little gifts and giveaways of no very great importance – like the 100 per cent relief on business rates for small rural firms. This is also, as most of these little giveaways are, a bad idea.

Rates, especially business rates, are the closest thing to a land tax our system has – and a land tax is the least distorting, and thus best, tax to have. Moving further way from the best tax just isn’t a good idea.

Much of the rest was nothing very special. The national living wage is a bad idea that will cause job losses. But we all knew that they would continue to raise it anyway. What politician could resist giving people a pay rise with other people’s money?

The announcement about salary sacrifice schemes was a damp squib. Everyone will pay the same tax on all forms of income, except those that the Chancellor likes (such as cycling to work schemes), which will continue to gain preferential rates.

And there will be no further rise in the fuel duty escalator – at least not this year, and not for seven years now. That’s a good idea – but a better one would be to simply scrap the thing.

Most people forget that, when first introduced by Ken Clarke, it was “to meet our Rio commitments”, meaning it’s about climate change. And the Stern Review told us what the size of that carbon tax should be in order to meet those: about 11p on a litre of petrol.

The escalator has already added over 24p – so we’re done, finished, time to scrap it. Unless Chancellors just like having something they can tell us they’re not going to do each year, of course.

As for the macroeconomic projections, which will hog most of the headlines, no one is very surprised – and no one should pay very much attention to them, either. Whether for GDP growth, the deficit or the size of the national debt, they’re not things that are in the control of the government, nor anyone else. And they’re also not things we can predict to this sort of level of detail, either.

Thus everything said about the national debt falling as a percentage of GDP by the end of this Parliament and all similar statements is just an expression of pious hope – most certainly not a commitment, and not really even a prediction.

Yet despite all this, there were two thoroughly good ideas in Hammond’s speech – the first being that the Budget itself should move to the autumn.

It has long been ridiculous that the tax rates and allowances for the next year are only announced mere weeks before that tax year starts. Giving everyone five months to digest them before they come into operation is an improvement.

It’s not going to make the actual contents of the Budget itself any better, for a government with a majority – and most do tend to have one – can ram through any Finance Bill it likes. But it does give us all a chance to adjust.

The other good idea is something of a personal victory – that my one and only major policy proposal is marching towards full implementation, in the form of the rise in the personal tax allowance to £12,500 a year. No, really, that was me.

Well, not all me: the idea was first mooted by Lord Saatchi and Peter Warburton in a Centre for Policy Studies report in 2001.

But when the “Living Wage” movement started to their annual announcements of the new level people needed to make, I would adjust the numbers on an article of my own – pointing out that if we just stopped taxing people who earned the minimum wage then they would, on that minimum, be getting what the post-tax Living Wage would give them.

These efforts – I am told – convinced a particular policy wonk, ensuring that the idea got to Nick Clegg’s ears, then made its way into the Coalition Agreement – the Tories having warmed to the idea thanks to the evangelising efforts of the CPS and others – and now continues along into this government. Indeed, the £12,500 a year target for allowances is an exact match for the full-year, full-time minimum wage at the time the convincing was being done.

Of course, given that we now have a national living wage, we really should be raising the allowance to £14,625. Which is a useful lesson for anyone who wishes to make the world better by influencing politics: even when your ideas do get picked up, the politicians will still get them wrong.

Anyway, in terms of the Autumn Statement as a whole, the various bits and pieces of spending and the trimming of the rules at the margins aren’t going to have much effect, simply because these sorts of actions don’t.

Apart from the increase in the personal allowance, the one purely beneficial change is the move of the Budget to the autumn. Which rather sums it up for me: the one important change in a major government financial announcement was to do with the calendar, not money.

But then, with something as large, complex and chaotic as an economy, the one and only thing that is truly within the power of any politician is the time he stands up to speak.

Tim Worstall is senior fellow at the Adam Smith Institute.