Outlook: An enterprising package of sweet nothings

An enterprising package of sweet nothings

THE PACKAGE of measures announced by the Chancellor in his pre- Budget report in an effort to make Britain a more entrepreneurial society scarcely looks any more potent in the cold light of day than it did the night before. With characteristic bluntness, the Institute For Fiscal Studies concluded they would have virtually no impact on investment and productivity. It is hard to disagree.

Adding up the Government's own figures on the likely costs of these measures, in terms of giveaway or foregone tax revenue, produces the grand total of a little less than pounds 1bn. While this is better than a kick in the teeth, it pales into insignificance against the hit business as a whole has taken from Labour since the new Government came to power.

Even the employee share ownership scheme, which at first blush seemed a quite bold initiative, turns out to be a good deal less adventurous than it looked. Tax breaks for employee share schemes are a disproportionate benefit to large listed companies - more than three quarters of FTSE 350 companies already have share schemes, but rather less than 1,000 unlisted companies boast them.

The lesson seems to be that large companies need little incentive to offer such perks while smaller ones generally aren't interested in them. The latest initiative seems unlikely to change that position. On the Government's own estimate, these new tax breaks will cost no more than pounds 400m a year and affect fewer than 700,000 employees. Again this is better than nothing, but it is hardly going to turn Britain into Silicon Valley.

The greatest brickbats have to be reserved for the Chancellor's proposed changes to Capital Gains Tax, which on close inspection fail to add up to more than a hill of beans. On this, the Chancellor was less than honest in his statement to the House of Commons, giving the impression he was slashing the tax to just 10 per cent on investments held for more than five years.

As it turns out, this concession applies only to "business assets". What this means is that only owner-businessmen, or very substantial outside investors in private companies, will benefit. For stock market investment, it only applies if you are rich enough to buy 25 per cent of the company. Interestingly, this might include the famous four who are buying into Knutsford, but it scarcely needs saying that this tax break isn't for ordinary mortals. For the vast bulk of investors, the rate remains firmly stuck at 40 per cent.

It is hard to know who most to blame for this mealy-mouthed response to the urgent need for capital gains tax reform - the Chancellor or his officials at the Inland Revenue. The Revenue is terrified of anything that might lead to tax "leakage". Presumably the Chancellor is equally terrified of being labelled the speculators' friend.

None the less, the evidence from the US of the effects of a big cut in the rate of CGT is so universally positive as to make it hard to understand why the Government persists with one of the most retrogressive regimes anywhere in the developed world. A surge in entrepreneurial activity and demand for venture capital funding are just two of the effects.

Higher share prices, lower cost of capital, greater demand for high risk, high tech investment outlets and enhanced liquidity in smaller company shares are some of the others. At the same time, there is hardly any evidence of greater tax avoidance or of income tax yields being adversely affected. With his coffers overflowing with bounty - it will not always be thus - there could scarcely be a better time for the Chancellor to grasp the nettle, and yet still he won't do it.