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Budget 2009: This return to high tax will only deepen our debt

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    Budget 2009: This return to high tax will only deepen our debt

    http://www.telegraph.co.uk/finance/f...-our-debt.html

    Budget 2009: This return to high tax will only deepen our debt
    Far from rescuing Britain's disastrous finances, the 50 per cent rate in the Budget will drive money out of the economy, says Margaret Thatcher's tax-cutting chancellor.

    The big issue is, of course, the economy, and in particular the disastrous state of the public finances. By contrast, last week's Budget, with its myriad pettifogging measures – most of them wrong-headed, such as the Mandelson bounty of a £300 million subsidy to the global automotive industry – is eminently forgettable and will be quickly forgotten.

    With one exception; and that is the abandonment of the 40 per cent higher rate of income tax I introduced 21 years ago, and its replacement with a rate of 50 per cent on higher incomes.

    When, in March 1988, I abolished all the income tax rates, then ranging up to 60 per cent, above the 40 per cent level (along with announcing a number of other income tax cuts, all in the context of a substantial budget surplus: how far-off those days now seem), it was before New Labour had been invented. So it was perhaps not surprising, if highly regrettable, that the old Labour benches opposite me erupted in such loud-mouthed disorder that the sitting of the House had to be suspended: the only Budget speech by any Chancellor that has ever been interrupted in this way.

    But despite its somewhat controversial launch, it was to prove highly successful. Far from costing money to the exchequer, it brought in increased revenue, as many of the ablest came to London from less benign tax regimes overseas; as many perks were abandoned in favour of higher pay; and as complex tax avoidance diminished. Indeed, the tax take from the highest paid (defined as the top 5 per cent of taxpayers) not only increased substantially in absolute terms, but it contributed a very much higher proportion of the total income tax take than ever before. And although it is not possible to measure this, it undoubtedly gave a fillip to the vigour and success of the British economy.

    It was successful in political terms, too. One sign of this was the way in which, one after the other, countries with higher tax rates came to follow the UK example. An even clearer sign was the determination of Tony Blair, a man of outstanding political nous (whatever his considerable failings as prime minister), to ensure that every New Labour manifesto – in 1997, in 2001, and in 2005, on which the present government was elected – contained a firm pledge that the 40 per cent higher rate would not be exceeded.

    And now it has been raised all the way to 50 per cent. This not only demonstrates that New Labour manifesto pledges are not worth the paper they are written on: it will be economically damaging. So far from contributing to narrowing the yawning deficit in the public finances, it will increase it as the highest paid move to more benign tax jurisdictions overseas, or else engage more actively in tax avoidance, of which the conversion of income into less highly taxed capital gain is only the most obvious of many examples.

    Who would have predicted, incidentally, that Gordon Brown's principal contribution to restructuring the tax system – apart from making it horrendously more complex – would be to increase the taxation of earnings and reduce that on capital gains?

    As for the renewed brain drain that the 50 per cent rate will engender, it is inevitably the highest of the high earners, who contribute most in tax yield to the exchequer, who will become tax exiles. Not only do they have the greatest incentive to do so, but it is far easier for them to move abroad than it is for those only slightly above the £150,000 threshold at which the new rate bites. The Tories have nothing to lose in the short run, and much to gain in the long run, from opposing it.

    But as I wrote at the start, the big issue is the overall state of the economy, and in particular the monstrous public sector deficits leading to a massive increase in public debt.

    The true picture is likely to be even worse than that painted by Alistair Darling last week. It is hard to escape the suspicion that the highly implausible trampoline recovery (to quote David Cameron's apt description) was forecast chiefly because a more likely path would have generated even greater public borrowing figures – and, in particular, would not have made it possible to present this year's deficit, a mind-boggling £175 billion, as the peak. As it was, the Chancellor was only able to massage next year's forecast figure down to £173 billion.

    But that is not the only reason why the true picture is likely to be worse. The Treasury's figures assume that the ballooning debt will be financed at today's low interest rates, which seems highly unlikely. In other words, the burden of debt interest, already massive and growing with the amount of public debt, will be considerably higher than is implicit in the Treasury forecasts.

    The Conservative government that is likely to be elected in a little over a year's time will need to bear down on public spending, in pretty well all its forms, even more grimly than the Thatcher government – which also inherited a substantial structural budget deficit – had to do. In last week's Budget, Mr Darling promised a further £9 billion of "efficiency savings" on top of the £5 billion he announced last November. It is an astonishing admission of how bloated and inefficient the present Government has allowed the public sector to become on its watch.

    The next government will have to force through every penny of these savings, and a great deal more, by difficult but perfectly realistic policy changes across the board. In government there are many problems where it is difficult to see what the right answer is. This is one where the solution is clear, and well known. The problem is that what is known to be required is widely considered not to be politically possible.

    The success of the Thatcher government, first elected 30 years ago next month, was that it extended the bounds of the politically possible. That is what the next Conservative government will have to do, starting on day one. The British people were ready for it, even if many of them did not like it then. They are ready for it now.

    Lord Lawson was chancellor of the exchequer from 1983-89.

    #2


    The success of the Thatcher government, first elected 30 years ago next month, was that it extended the bounds of the politically possible


    Wots he smoking ???

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