Tax and Fiscal Policy

IEA responds to the Budget


Economic Theory

Christopher Snowdon writes for the Telegraph

Mark Littlewood, Director General of the Institute of Economic Affairs, said:

“Economists have long been predicting an economic downturn, but no one could have anticipated that it would be triggered by a global pandemic. Nonetheless, the coronavirus outbreak highlights that the UK government has again failed to fix the roof while the sun was shining.

“Successive governments have lacked real fiscal discipline and failed to eliminate persistent deficits, leaving the current Chancellor with less room for manoeuvre.

“Fiscal loosening to cope with the Covid-19 shock is understandable, but the Chancellor seems to think the only best way to boost growth is through public spending. The Budget rightly still meets the fiscal rules set out in the Conservative Manifesto and a temporary hit to the 2020 numbers shouldn’t change this.

“The Chancellor hinted these could be relaxed in the near future but there is no reason not to balance the books in 2023. The hit to the public finances from the coronavirus is, as the Chancellor was at pains to stress, temporary and not structural, so there are no grounds for changing fiscal strategy – merely a need for some short term fiscal tactics.”

Commenting on increases to the National Living Wage, Professor Len Shackleton, IEA Editorial and Research Fellow, said: 

“Big increases in minimum wages will raise employer costs disproportionately in those poorer regions of the country the Prime Minister wants to help. Already, the ratio of minimum wages in Northern Ireland, Yorkshire and Humber, the East Midlands and Wales is higher than the 66% target the Conservatives have set.

“The Chancellor has seemingly bought into Labour’s view that pay can be permanently pushed up by central diktat without damaging consequences – namely reduced employment growth.

“Minimum wages were set by the Low Pay Commission (LPC), a panel of economists, industry representatives and trade unionists with a mandate not to threaten jobs. It’s difficult to see any point in the continued existence of the LPC, given its role is now to implement an arbitrary government target for the National Living Wage – which will be raised from £8.21 per hour today to £10.50 in 2024. It would be ironic if higher unemployment resulting from this wage hike were to offset the new Budget measures to boost investment and jobs in poorer regions.”

Commenting on the housing announcements, Dr Kristian Niemietz, IEA Head of Political Economy, said: 

“The Chancellor’s announcements on housing miss the point. The crucial bottleneck of the housing market is land supply: we are simply not releasing enough land for housing development.

“As long as that bottleneck remains in place, pumping more money into housing construction – whether that is the announced £12bn for affordable homes, the 1% interest rate cut for loans to build social housing, or the £400m for building on brownfield sites – will simply push up land prices even further. It will therefore ultimately make little difference to housing affordability.

“If the government had the courage to sort out the above-mentioned supply-side bottleneck (on which the Chancellor had virtually nothing to say), it could quite easily improve housing affordability across the board, while saving taxpayers’ money in the process.”

Commenting on the increase to the National Insurance threshold, Professor Len Shackleton, IEA Editorial and Research Fellow, said: 

“Raising the National Insurance threshold from £8,600 to £9,500 will help those on lower incomes manage their finances. However, the dual system of income tax and national insurance – which no longer covers the benefits it claims to finance – is absurd. It misleads the public, who in large numbers still imagine state pensions and job-seekers’ allowance are paid from a fund accumulated from past contributions.

“The system involves employer as well as employee contributions, which confuses employees into thinking someone else is contributing to their benefits when the incidence ultimately falls upon workers in terms of lower net wages and/or less employment.

“Instead, the government should merge National Insurance with income tax to create a more transparent, cost-effective system. It could also be extended to the self-employed and those working past retirement age in order to broaden and equalise the tax base.”

Commenting on decision to keep the freeze on fuel duty, Dr Richard Wellings, IEA Head of Transport, said:

“The decision to keep the freeze on fuel duty is the right one. Fuel duty is effectively a tax on business and trade as it drives up travel-to-work expenses and the costs of doing business. The government would do well to look at further reductions to boost economic activity in the longer term.”

Commenting on plans to reform Entrepreneurs’ Relief, Annabel Denham, IEA Director of Communications, said: 

“Entrepreneurs’ Relief is a loophole in an already complex tax code. It isn’t what we would advocate if designing from scratch. But it does give Britain a competitive edge in attracting foreign talent and the Chancellor has struck the right balance in keeping the scheme while lowering the lifetime limit.

“An overlooked element of Entrepreneurs’ Relief is how it interacts with the Enterprise Management Incentive. EMI shares qualify for the discounted rate on capital gains and Entrepreneurs’ Relief gives the UK the lowest effective tax rate on stock options for early-stage employees in the world. Given many scaling businesses lure talent with equity in place of higher salaries, scrapping Entrepreneurs’ Relief altogether would have risked making it harder for UK startups to compete with larger incumbents.”

Notes to editors

For media enquiries please contact Emily Carver, Media Manager: 07715 942 731.

For further IEA reading on housing, click here.

For further IEA reading on the minimum wage, click here.

For further IEA reading on fuel duty, click here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.