Tax cuts are needed to save our economy irrespective of who wins the next election - Brian Monteith

The real problem has been Tory prime ministers in love with high public spending

When the Chancellor of the Exchequer, Jeremy Hunt, rises to deliver his Budget statement on Wednesday it shall undoubtedly be the most important for his party, and possibly the country, since the Conservatives came to power in 2010.

It did not have to be so, of course. When George Osborne delivered his initial budgets he was not only dealing with substantial deficits in the public finances that Labour had allowed to build up, but had to work in league with his coalition partners, Nick Clegg’s Liberal Democrats. Yet for all the miss-steps that Osborne can be accused of the deficits were coming down, inflation was low and steady and the tax burden was being reduced.

Now the state of the public finances is again of serious concern and there is no-one else to blame but the Conservatives alone. The idea that it is all down to the costs of Government’s pandemic response is a convenient deflection, but it is still a deflection, and it is still owned by the Conservative Government.

The claimed immediate protections of the two national and the third localised pandemic lockdowns are now increasingly being challenged as being of less importance than the subsequent (and predicted) costs to life and societal disfunction that they caused. On top of the panicked response that wreaked havoc upon diagnoses and treatments of cancer and many other life-shortening illnesses there is the continuing impact on education in schools, the shuttering of businesses never to be seen again, and the huge growth of people now receiving benefits for being unable to work.

That Labour has said it would have would have had earlier, deeper and longer lockdowns than those enforced by Boris Johnson does not let the Conservatives off the hook for the problems they now face.

This Conservative predicament is especially acute because – pandemic or no pandemic, war in Ukraine or no war in Ukraine – the cause of the economic malaise has as its root cause the various Conservative administrations behaving like Labour Governments of the past. The real problem has been Cameron, May, Johnson, Truss and now Sunak all fell in love with and supported high public spending. As a result we have seen the growth of ever higher taxes as the inevitable cost for an overall rise in public spending, even though there are individual spending departments that from time to time face spending cuts.

The real danger this scenario poses is that economic growth falters and flatlines into stagnation, making it near impossible to reduce the burden government places on the public it serves – all the while public services break down and are increasingly no longer fit for purpose.

Whether one believes or not that there are certain taxes that can deliver higher revenues by being cut (and I do) it is now imperative some taxes are cut so the economy provides greater reward to those who drive it forward so we can avoid being stuck in a morass of high-borrowing, high-spending, high-taxing to provide low-functioning public services.

Here are some figures to explain the scale and depth of the challenge.

If the personal tax allowance had risen in line with inflation it would have risen from £12,500 in 2020 to £15,330 now – a difference of some £2,830 per taxpayer, saving taxpayers £566 each.

The £20,000 ISA allowance to encourage personal saving would be at £25,580 today if it had been indexed to inflation instead of being kept at its 2017 value.

If indexed the Capital Gains Tax allowance would today be around £13,500 but was actually slashed from £12,300 in the 2022/23 tax year to £3,000 in the 24/25 tax year.

The late Alistair Darling increased the inheritance tax threshold to £325,000 in April 2009, where it has stayed ever since. If it had been indexed for inflation it would now be £586,172 – and if it had been indexed to average house price inflation it would be even higher, at £591,500. It is astonishing to think that raising the Inheritance Tax threshold to £600,000 would in reality only return us to the halcyon days of Labour Chancellors!

We then have the tax traps set by Alistair Darling and George Osborne that need to be abolished.

The first was Darling’s law that for every £2 earned above £100,000 the personal allowance is reduced by £1 – creating the absurdity of those earning between £100,000 and £125,140 moving from a published rate of 40p into an effective tax rate of 60p until there is no allowance left. Bizarrely, at that point the taxpayer crosses into the 45p threshold and starts paying effectively what is a lower rate.

Forgetting the additional cost of National Insurance, the real tax rates British people pay are therefore 20p, 40p, 60p and 45p. This is beyond the looking glass daft.

Not to be outdone, Osborne’s law was to phase out Child Benefit to those earning between £50,000-£60,000 – this imposed a marginal rate of 51 per cent on a taxpaying parent with one child and a 59 per cent marginal rate on a taxpaying parent with two children (all before National Insurance). To pile on the cruelty, it takes only one earner in a two-earner household to breach the £50,000 level to start losing the benefit – yet two parents earning £49,999 (and enjoying a total household income of £99,998) would see no child benefit lost.

Those examples only describes issues in personal taxation crying out for attention, there are similar examples of business taxes being increased and anomalies created that hobble our economy from creating the jobs and prosperity we all want to see.

Taking such examples in the round we can see the enormity of the problems facing Jeremy Hunt that makes his Budget on Wednesday the cliffhanger on which our fortunes depend. Jeremy Hunt is as guilty as Chancellors before him but he now has the chance to change that.

Brian Monteith is a senior advisor to the Tax Reform Council