Tax and Fiscal Policy

The Autumn Statement: ‘Sit down, shut up! Sit down, shut up!…’

It is often suggested that the House of Commons is rather like a football ground and, if I had been there today, I would have thought about starting the above chant, common at football matches, at 12:50pm – less than 20 minutes into the statement.

The IEA suggested some years ago that the annual Budget in its current form should be abolished. The Treasury, in conjunction with ministers should, of course, set departmental spending totals in a comprehensive review every few years. Each year, there should be a short budget statement which makes adjustments to those spending totals, reports on the progress of the government’s fiscal position and sets the appropriate tax rates for existing taxes. Tax legislation should be brought in separately, fully debated by both houses of parliament and how departmental money is spent should be dealt with by the relevant ministers.

There is an even stronger case for abolishing the Autumn Statement. Of course, Parliament should hold the Chancellor of the Exchequer to account. Perhaps there should be some sort of short mid-year statement on the fiscal position (tax receipts, spending totals, borrowing and debt), followed by questions: that would have taken us to 12:50pm from a 12:35pm start. But the Autumn Statement in its current form has the opposite effect of holding the Chancellor to account. He has all the cards and Parliament is on the back foot. The Statement can be used as a vehicle for anything the Chancellor likes.

Indeed, the current whole charade leads to public choice economics at its worst. We have had a series of leaks designed to assuage particular interest groups that have involved promised increases in spending or reductions in taxes welcomed by health sector workers, people who live by the coast, motorists, people who live near Stonehenge, and so on. This was then followed in the statement by a series of further measures such as carriages on transpennine trains and tax breaks for orchestras. Individually, the amounts of money are not very large but they add up to a considerable sum. This is a typical policy of benefiting concentrated interest groups at the expense of the dispersed generality of taxpayers.

Of course, this is one reason why we have such a complex tax system which, for a family with three children, has 12 different rates of combined marginal tax and benefit withdrawal. Providing welfare benefits to particular groups and trying to obtain more tax from income taxpayers in ways that are not transparent is all part of the same policy of promoting particular interests above the general interest and certainly the Autumn Statement has made the tax system more complex, creating more of the sort of loopholes that are then exploited by people who are subsequently accused of aggressive tax avoidance.

And the same is true on the spending side of the equation. As noted above, there has been a number of announcements of new spending initiatives to benefit particular interest groups (though sometimes if it difficult to untangle new announcements from the re-announcement of existing commitments – again creating a problem of transparency). This is all in a context of a general reluctance to pay any attention at all to reducing benefits paid to older people or make cuts to other major budgets such as the NHS and schools. Older people have been exempt from the reductions in the real level of welfare payments to many of those of working age and it has been – and will continue to be – government policy to raise the state pension by the higher of price inflation, wage inflation and 2.5 per cent. This is a policy which leads to an absurd and complex relationship between the real level of the pension (after inflation) and the level of inflation itself. Pensioners could benefit hugely from deflation as nominal tax receipts fall. Again this is public choice economics at work as pensioners make up a higher and higher proportion of the electorate.

Of course, the result of all this is a tax system that is not fit for purpose and government spending that is now actually increasing again. Nominal total managed expenditure has increased since 2010; real total managed expenditure has fallen by just 0.4 per cent per year; and total managed expenditure as a proportion of GDP has barely fallen at all. The deficit, of course, seems stuck at its 2013 level.

No doubt the government deserves some plaudits for cutting the deficit somewhat and for putting pressure on the in-work benefit budget. However, the big picture is grim: the tax system is incoherent (and more so now than in 2010); spending priorities seem to be driven by interest group politics; and the form of the annual Autumn Statement (which should perhaps be renamed the annual ‘Autumn Showcase’) is part of the problem. Public choice economics teaches us that if you want to have better decision making you have to change how decisions are made. That requires governments to make short-term sacrifices (removing their opportunities to pander to interest groups) for the greater long-term good.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.