Paying for our water would make us value each drop

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The Independent Online

This may turn out to be Gordon Brown's last Budget next Wednesday but don't count on it. After all, some of us thought that, after the election, Tony Blair would promote him to one of the other great offices of state. But at least the end of his career as Chancellor is drawing closer and the time has come to ponder how it will be regarded.

To his credit will be the achievement of sustaining a long period of economic stability. True, that has been achieved in part by the Bank of England's monetary policy, but the strong counter-cyclical fiscal policy played a big role. Some of the costs of this have yet to be fully appreciated, for the fiscal position has deteriorated from a near balance to a deficit of more than 3 per cent of GDP. There are also some slightly troubling signs that things might unravel, with consumers dependent on high borrowings, and unemployment now rising quite swiftly. Nevertheless, at a macro-economic level, Mr Brown deserves considerable credit.

The two main lines of criticism come at a micro level. One is that the large increase in public spending has led to wastage: the scale of the additional input of revenues has not resulted in a corresponding increase in output of services. The figures suggest that the efficiency of the public sector has fallen. There has been some increase in output but the rise has been slower than the rise in the money put in. This point has been widely noted and not a lot can be added to the debate at this stage on the spending side.

Much less has been said about the problem on the revenue side. Tax revenue at 36.3 per cent of GDP is more or less the same now as it was in 1997. But the perception is that taxes have gone up a huge amount.

In short, the Chancellor has managed the reverse of the trick described by the famous French finance minister, Jean Baptiste Colbert. This was to pluck the goose in such a way as to extract the maximum amount of feathers with the minimum amount of hissing. Mr Brown has managed to generate a huge amount of additional hissing without increasing the haul of feathers. How on earth has he done it?

Three things seem to have gone wrong. One is that the tax system has become much more complex. Because he has fiddled so much with taxes, this increases the perception of the tax burden. The Treasury has been criticised a lot for micro-management on the spending side but the micro-management of taxation may turn out to be even more damaging. Much of this complexity is at a corporate level, where companies have had to comply with more and more complicated tax legislation, even though they have ended up paying pretty much the same level of tax. Some of these new burdens are simple, such as student loans, but that means another line on the tax slip. Others are extremely complicated, such as North Sea oil taxation.

All this has happened against a background of tax simplification in many other countries, and, for businesses, cuts in tax rates. Whereas in the mid-1990s UK corporation taxes were low by European standards, they are now middle of the pack. Ireland is an extreme example of tax-cutting, and a tremendously successful one at that (see left-hand graph above). But the expansion of the EU has brought down the average level: so the UK, instead of being below the EU average, is now above it.

The accountancy firm Grant Thornton points out that falling down the league table of corporation taxes will make business much more vocal in its opposition to taxation, as the burden is forecast by the Treasury to rise to 38.5 per cent of GDP in 2007-08. If this happens it will be the highest level for 25 years.

The second thing that has happened is that taxation has become more visible to ordinary punters. Take a budget flight and the tax is higher than the air fare. Local government taxation has risen far faster than inflation. Car taxation has risen, as well as becoming more complicated. For Londoners, there is the new congestion tax - though that has nothing to do with Mr Brown. The new pension rules that come in at the beginning of next month potentially impose an income tax of 55 per cent, and some will need to invest in lower-earning assets to avoid it. Yes, with a lot of work, people can mitigate the impact of all this, but it requires careful planning.

The third thing that has happened is that, thanks to rising incomes and wealth, taxation catches far more people. The best example is inheritance tax, where those of quite modest means are caught because of the rise in value of their homes.

Ernst & Young has taken up the cudgels here, arguing that the threshold should be increased to exclude the principal home, but that the tax should be applied to lifetime transfers. At the moment people can give away their money and, provided they live another seven years, the gift is tax-free.

Whether that is a sensible way forward, though, is another matter. It would be wonderful for the accountants, managing a register of lifetime gifts. It would be wonderful for the Channel Islands and the Isle of Man as it would reinvigorate the exodus of tax refugees. But I doubt it would bring in any more money. Indeed, it might well bring in less. The revenue is only £3.3bn, much less than 1 per cent of government income, and less than the shortfall in UK tax revenues this year. By contrast, the top 1 per cent of earners pay a quarter of all income tax, and you would not need many of them to move offshore to find you were out of pocket.

Indeed, inheritance taxation is going out of fashion generally. Canada, Australia and New Zealand are among the countries to have abolished it, and the rest of Europe has lower rates than us. The US and Japan retain higher rates than Britain, but in practice, people in the US have even more ways of avoiding the tax than those in the UK. The American rich seem to find ways of passing their wealth to their kids.

The obvious objection is one of equity: to what extent is it right that children should get the wealth of their parents? But even that should carry less weight than it did a generation ago, for other evidence suggests that economic status is determined more by current earnings than inherited wealth. As the various "rich lists" show, the new rich make their own money.

This Chancellor is not going to do anything about either the complexity of taxation or the spread of people caught by it. So the next stage of tax reform will have to come from someone else. Whoever that is should remember Colbert's advice and focus on getting the money as simply and painlessly as possible. Meanwhile, expect the sound of hissing to become even more deafening, especially if poor Mr Brown has to hang around in his present job for much longer.

It is World Water Day tomorrow, a useful moment to focus on what the world is recognising may be its greatest resource challenge. There are alternative energy supplies but there are no substitutes for water.

The trouble is that the world wastes water. It wastes it here in the UK, with a distribution system that has been sorely neglected and is only now being expensively upgraded. But our own wastage is nothing compared with environmental catastrophes such as the drying-up of the Aral Sea, inefficient irrigation in Arizona and California, the huge costs of the Chinese dam programmes, the sinking of Mexico City and so on.

Viewed globally, the problem is fundamental, but it is much more one of waste and inappropriate use than of inherent shortage. It is silly to use expensive water to irrigate low-value crops that need a lot of it, such as cotton.

But the very phrase "expensive water" leads to a political problem, for water is widely seen as a public good. It is regarded as something that people have a right to have at minimal cost. Water ought to be free, the argument goes.

But if something is free, people tend to waste it. What do you do?

One practical way forward is charted in a new booklet, The Water Revolution, from the International Policy Network, a London-based think-tank. Its editor, Kendra Okonski, has collected a series of narratives from around the world that show that if there is ownership of water in some form, then it will be better used. These examples include small dams in villages in Gujarat, designed to catch run-off, and informal "illegal" entrepreneurs who put in water systems in African cities to solve the water and sanitation problems left by government.

Politicians don't like informal or entrepreneurial solutions because it suggests that they have failed, which of course they have. Heavy users of water who get subsidised supplies, such as many farmers, don't like these solutions because they have to pay the actual cost of supply. So there is plenty of opposition. But the value of this little booklet is that it looks at practical solutions: bottom-up initiatives that produce good outcomes by working with the grain of the market rather than against it. Makes sense.

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