All government spending should come under the microscope
- The government’s Spending Review will be far from comprehensive. With the triple-lock for state pension increases and NHS, per-pupil funding for schools, international aid and the defence budget all protected, the overwhelming majority of government spending has been ring-fenced from cuts.
- Rather than salami-slicing remaining departmental budgets to hit arbitrary savings targets, the government should rethink its functions from first principles.
- The spending review should take account of changing demand patterns and relative prices in certain sectors and should not maintain arbitrary targets for spending as a percentage of national income in others. It should take into account the long-term effects of ageing on health and pensions spending. Capital spending decisions should prioritise projects with the highest economic return.
The tax credits fiasco
- The government’s proposed tax credit changes should be abandoned. They significantly increase marginal tax rates for the low-paid. Delaying implementation or other minor changes to the reforms will not change this.
- Instead, the government should overhaul the system. It should replace tax credits with a negative income tax based on household income with the amount of tax-free income based on tax allowances which would be transferable within households. This would end the discrimination against family formation inherent within the current system. Consideration should be given to increasing the conditionality of benefits with more stringent work requirements.
The tax system
- The Autumn Statement should make plans to simplify the tax system and make it more economically rational. The government should not put forward changes to the system of pension tax relief except that the tax-free lump sum should be abolished or severely restricted. Property taxation should be completely overhauled, with the long-term aim of abolishing council tax, business rates and stamp duty, and replacing them with a Land Value Tax on commercial land and a tax on imputed rent for residential property.
- Personal tax thresholds should rise by the higher of inflation or earnings growth in the coming years after a number of years of under-indexation. Further increases in tax thresholds at the lower end should focus on raising the starting threshold for national insurance contributions. The withdrawal of the personal allowance above £100,000 should be abolished as should the higher rate of income tax.
- The VAT base should be broadened to include VAT at the full rate on domestic energy consumption. Other extensions of the VAT base should be implemented in the long run. This change and the restricting of the tax-free lump sum for pensions would facilitate all the tax reductions above plus a number of measures that would considerably simplify the tax system.
- The government should be ambitious in its fiscal decentralisation agenda. But rather than ad-hoc City Deals powers for spending, revenue raising and regulation should be devolved to all local authorities.
Read the press release here.