Hamish McRae: Brown can fast-forward revenue but what flatters the finances now is gone tomorrow

Bringing forward tax receipts may conceal a deterioration
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The Independent Online

Second thoughts are usually better than first impressions, and with Gordon Brown's Budgets this is particularly the case.

First impressions last week were of no change on the economic side but of a political manifesto for the next leader. Lots of minute tweaks to both tax and spending but no economic surprises - coupled with broad political aspirations about the future of the country.

Among the critics, the immediate focus was on spending and especially the extent to which the additional money for the NHS has been wasted. The hospital closures have rather underscored the critics' case, since the expansion of NHS funding was based on Derek Wanless's report, commissioned by the Chancellor.

This is a legitimate line of criticism in that the surge of spending on the NHS continues for another year or so, but it goes back to decisions made several years ago. It is not really about this Budget.

I think that when the experts have had time to claw over the Budget, they will focus not on the spending but on the revenue side - and the Government's struggle to collect the extra taxation it needs to keep the fiscal deficit under control.

When a new finance director looks at the affairs of a company under pressure, there are two immediate things to be done. One is to find ways of funding spending that do not require cash to go out now - paying bills more slowly or selling surplus assets. The other is to send out bills earlier and collect debts more aggressively.

We know the Government is doing the former. I have not heard of payments being delayed yet - "the cheque is in the post" response - but if it builds a hospital through a private finance deal, the capital cost is spread over 30 years and the implicit borrowing does not show up in the public sector borrowing requirement.

But hardly any attention is being paid to the extent to which revenue is being brought forward. There was a surprise jump in corporation tax receipts in January, which may have been the result of a tougher stance by the Revenue: there seems anecdotally to have been a rise in tax investigations. But the explicit bringing forward of tax is under the radar.

There was one hint in the Budget that this is a planned policy. People who file individual tax accounts will now have to submit them several months earlier. That won't in itself bring in the money sooner, but it would make it possible for the Revenue to ask for part-payment of a tax liability at an earlier date. You cannot be asked to pay tax until the return is in; once it is, you can.

As it happens, I have come across two examples in recent weeks of this effort to bring forward revenue. One is that people who have income from savings - so-called "unearned income" - are being asked to make an early part-payment.

The other is a change to the dividend income from small family firms. The practice in the past has been for the company to wait until the end of the year, review the profits, make a decision about a dividend and pay it. Now, apparently, it is required to have a board meeting before the end of the financial year, decide on a dividend and actually pay it before the its financial year ends. The result is that the firm pays out two dividends in the same year - nice for the shareholders except that they have to pay their own tax one year earlier than they otherwise would.

How big are these changes? Have a look at the pie chart. Income tax is huge, by far the largest single tax, with £144bn expected to come in this coming financial year. Leave aside PAYE - of which more in a moment - and let's say that the non-PAYE segment is £40bn. All you need is for 10 per cent of that tax to come into an earlier year and that is £4bn - more than the entire revenue for inheritance tax.

In addition there are small tweaks to PAYE. For example, if a company pension scheme is changed from a group scheme to a group personal scheme (sorry, I am not quite nerdy enough to understand the difference), people initially get only basic tax relief on their pension contributions. The higher-rate tax is claimed back later. Yes, they can get their code changed by ringing up the tax office but the default option brings money into the Treasury earlier. Ultimately, no more money will be collected but it is perfectly plausible that 1 per cent of the PAYE revenue could come in a tax year earlier. That is £1bn.

So what? Ultimately there is no change to the Government's revenue. But if £5bn comes into the 2005-06 national accounts instead of the 2006-07 ones, it would conceal the underlying deterioration of tax receipts.

In the longer term, the improvement disappears. If people wise up to what is happening, they will adjust their behaviour. High-net-worth individuals pay a disproportionate amount of income tax; their accountants will spring into action. But meanwhile a sudden extra inflow of cash will make Mr Brown's revenue projections appear more credible. Despite his reputation as a stealth-taxer, it is only in this year that the proportion of tax relative to GDP has passed the level when he came in. The tough bit is now.

At one level, this aim to collect money sooner is perfectly sensible. The Government is behaving like a tightly run business. We have all had experiences of companies that demand money upfront and pay their bills late: on the one hand, the pestering phone call asking for payment, and on the other, the "Terribly sorry, my screen crashed and I couldn't put it through. I'll make sure it catches next month's accounts."

The examples sketched above are my worm's-eye experience in the past few months; there must be scores of other devices. But cash coming in now is cash not coming in later. So the Chancellor is making himself look prudent today at the expense of his successor.

And so it comes back to politics. Mr Brown has to move on. This is not a disaster in national economic terms - we are talking perhaps of 1 per cent of tax revenues coming forward one year, maybe a bit more. But politically this is serious stuff. He has missed his revenue forecasts so often and has so little room for manoeuvre that his credibility is right on the line.

When the Chancellor took office, he was told by civil servants that everything was in excellent shape - better, in fact, than he had maintained in opposition. His successor will, I suspect, receive a rather different greeting.

They don't need any hardship to throw a good riot in France

In our kitchen we keep a Parisian cobblestone from the student riots of 1968, picked up by my spouse, who was on the barricades. She always denies hurling it. We keep it as a constant reminder that the French do riots very well, but somehow, the economy always manages to recover with few scars.

And so I suppose we should regard the latest outbursts: another example of a long-established tradition rather than some indication of a deeply troubling French malaise. But the timing is surprising as it comes when the French economy seems to be picking up and when French wages are at an all-time high. In nominal terms, they are up 3 per cent year-on-year. You would expect such unrest if living standards were stagnant, as they have been in Germany - not when they are improving.

But it is not the people who are benefiting from these higher wages who are manning the barricades. It is the students who want proper jobs, not short-term contracts. They are protesting against a two-tier labour market.

From a macro-economic point of view, the danger is that wage pressure from the people in regular jobs will increase inflation. This is not just a French problem. As the core European economies pick up, wage pressures will rise. It may appear strange that core Europe is suffering from wage inflation when unemployment is around 9 per cent, but this insider/outsider problem is what the students are protesting about.

So what will happen? My guess is that the French government's proposals to reduce the protection for temporary employment will be withdrawn or at least watered down. They would only be a patch on fundamentally flawed labour laws and really not worth fighting over. So the French will muddle through with efficient large companies, a good small business network but too few jobs to go around.

We await a reaction akin to that of Charles de Gaulle, who faced down the '68 rioters with the memorably vulgar expression that he would accept protest but not a chie en lit.

The English equivalent is to foul one's nest, but like so many things, it works better in French.

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