IoD: 10p equivalent income tax rise since 1997

Ruth Lea, Head of the Policy Unit at the IoD released a comment yesterday entitled: "Tax 'n' Spend is here to stay", following the recent Budget announcements. Although more of general interest than a 'contractor' story, the article points out the astonishing rise in the overall tax burden since 1997 - as this extract shows:

"The tax/GDP ratio was 35.0% in 1996/97, but by 2000/01 it had risen to 37.7% (equivalent to an increase of over £25bn or over 10p on the basic rate of income tax). Moreover, it is projected to rise to 38.3% in 2004/05."

We have included Ruth Lea's comment in its entirety below:

"Last month I discussed our Budget Representations "Tax and Spend: Gambling on Better Public Services". I suggested that there was a danger, a very large danger, that any extra funding for the public services, especially healthcare, would disappear down a "black hole" unless there was radical reform to the supply side. In other words, increasing funding without reform was a huge gamble on delivering better services. And, I would add, without incentivising extra private sector funding, and we accept the need for extra funding, and introducing choice and competition, we believe there is little chance of delivering genuinely patient-led healthcare. I, for one, would like choice in NHS provision, especially as I pay so handsomely for it.

Well, the Chancellor took an enormous gamble on 17 April in his budget, and the increased funding for the NHS was, I felt, quite mind blowing. NHS expenditure is pencilled in to rise from £65bn in 2002/03 to £105bn in 2007/08 (some 8 ½% of GDP and expected to be the highest public spend on health as a per centage of GDP in the EU). This means, on average, step increases of £8bn (cash terms) each year and an average annual increase in real terms of 7½%. These are huge increases and it is very difficult to see how the NHS can usefully allocate these sums with its current highly centralised and politicised restrictions - so typical of large nationalised monopolies - where the service is driven by initiatives and not patient choice. There are also major capacity constraints. The expenditure plans spell waste, much more waste, to me. And a waste of people's (and business's) hard earned taxes. This is gambling on a big scale and surely a gamble that will fail.

On 26 March 1997 Tony Blair said "today marks the burial of tax-and-spend politics from Labour". Well, on 17 April 2002, "the mummy returned".

The tax increases that accompanied the NHS expenditure increases were equally mind blowing. Taxes are expected to rise by £6.1bn in 2003/04, £7.6bn in 2004/05, and £8.3bn in 2005/06 (equivalent to well over 3p on the basic rate of income tax). We were, of course, being softened up for big tax increases and, from 2003/04, we're getting them. If the economy falters, as it could, taxes could rise further in order to maintain the Chancellor's fiscal rules. This is a high-risk strategy. It is another gamble.

Now we in the IoD favour a low tax, low regulation economy, but there is no doubt that taxes as a per centage of GDP are rising. The tax/GDP ratio was 35.0% in 1996/97, but by 2000/01 it had risen to 37.7% (equivalent to an increase of over £25bn or over 10p on the basic rate of income tax). Moreover, it is projected to rise to 38.3% in 2004/05. We in the IoD emphasise, time and time again, that as the tax take rises, then inevitably the public sector crowds out the more efficient private sector and this leads to general efficiency losses in the economy. The economy may keep growing as public activity displaces the wealth-creating private sector, but the dynamism and competitiveness of the wealth-creating sector is drained out of it.

I remember the sheer awfulness of the 1970s only too well. And I also remember the struggles of the 1980s as some very painful but necessary reforms were implemented, but they finally and triumphantly bore fruit in the 1990s. I do not wish to see a return to the 1970s but there is already convincing evidence that UK competitiveness is being damaged by the higher taxes and heavier regulations that have been imposed over the last 5 years. Both the Institute of Management Development and the World Economic Forum compile international "competitiveness" league tables. They both show that since 1997 the UK has consistently slipped in competitiveness. Government, please take note.

But, it is not just that this budget will lead to big-time increases in overall taxation, it is the fact that the brunt of the increases will fall on the business sector ("enterprise") which is so concerning. The milch cow was milked again and is likely to be milked again (Tony Blair has not ruled out further tax rises). The higher taxes from business will include £4bn in 2003/04 from increased employers' NICs (a "tax on jobs"), £450m from increased self-employed NICs, £350m from "modernising" the taxation of UK branches of foreign companies (another whammy for the City), £450m from increased North Sea oil taxation and £350m from changes to VAT "anti-avoidance" measures. This gives a total of over £5½bn. And there were other increases affecting the business sector.

The Chancellor made a great deal of "enterprise and fairness", but where, one may ask, is the true "fairness for enterprise"? Well, yes, of course, there were a few bonbons for business ("enterprise") even if they have been oft-repeated and are limited-in-application.

They include, for the record, the tax credit on large firms' R&D, tax relief for acquisitions of intangible assets; tax exemption for companies selling big shareholdings; VAT simplification; and cuts in Corporation Tax for small businesses and help with administration costs following the Carter Review. Welcome as they are, they hardly offset the huge raiding of business's piggy bank by the Chancellor.

These competitiveness-damaging higher taxes, of course, come on top of many other competitiveness-damaging increased costs for business. Off the top of my head, I can recall a net tax increase of £5bn a year following the abolition of the tax credit on dividend payments in 1997, a cumulative total of £15bn since 1997 of sheer red tape costs and £2.7%bn a year for the National Minimum Wage. It all chips away at business's ability to compete in a fearsomely competitive world - unless, of course, you work in the NHS where there is no competition at all.

And tax and spend? Well "tax 'n' spend is here to stay".

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