Hamish McRae: Blame Brown, not officials, for this cock-up

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Are you one in six millions and got your letter from the tax people yet? And do they want more money from you or have they charged you too much in the past? And, of course, why on earth cannot these people get things right? For most of us the really upsetting thing about this whole sorry saga is the way it highlights the asymmetry in our relationship with the government. If they make a mistake and owe you money you eventually, after a lot of hounding, get your money back. (Their current trick is to delay payment by saying they are making additional security checks.) But if you make a mistake, for example paying late, you get charged interest and maybe even have to pay a penalty.

Yet however upset we may feel and however strong the temptation to blame the tax authorities for what may be the largest single administrative cock-up by a developed country's government for the past generation, it is really important to learn the right lessons from this and not the wrong ones. For the core of the problem is not that we have an incompetent civil service nor that we have fundamental flaws in our tax system. Rather it is that an inherently honourable government department has been undermined over a period of years by unreasonable demands by politicians.

It is too early to see the detail of what has gone wrong but we know the broad outline of the story. Two departments, the Inland Revenue and Customs & Excise, were merged in 2005 by the then chancellor Gordon Brown, ending a separation that goes back to 1909. You can see the argument – that it is illogical to have two departments collecting taxes, not one – but in practice the task of collecting direct taxes is very different from collecting indirect ones. The latter is much more hands-on, visiting businesses and so on, whereas the former relies more on the scrutiny of accounts.

Merging was always going to be a nightmare, as some of us commented at the time. But this error was compounded by two further factors. Staff was cut, on my quick tally, by close to 20 per cent as a result of "efficiencies" from the merger. Offices were closed.

It gets worse. Not only were departments merged and staff cut but the poor department was loaded with progressively more difficult tasks as Brown made the tax system more and more complicated. You may recall little spending schemes and little "incentives" to try to make us do this, that or the other. The fact that revenues repeatedly, year after year, fell short of Treasury estimates put further pressure on the civil servants. Data was lost. New computer systems, as always, failed to live up to their expectations. Some staff took early retirement. Some resigned. And those that stayed became deeply demoralised. I recall that the Revenue & Customs reported the lowest levels of employee satisfaction of any government department.

The good news is that we can learn from this and if the new government has any sense it will do so now. The most obvious is that we have too complex a tax system. The PAYE mechanism is good and has functioned well since its introduction in 1944. But the more tortured the rules and exceptions imposed, the more likely it is that errors creep in. The additional complexity of the National Insurance system has made matters even worse. You cannot change things at a stroke but tax simplification should be a prime aim of this government.

A more general point follows. If you are cutting staff you must cut functions. So the aim of the Government should be to do less but do it better. We need a government that bears in mind the practicalities of how policies will be implemented rather than whether they will make a good headline.

Finally we need ministers that respect civil servants. You don't scream at them; you don't throw staplers at them; you don't make loyal officials come out of a meeting shaking because you lost your temper when they brought you unwelcome news. I have been learning more about this behaviour since the last government fell and the more I hear the more appalled I am. This is not just a matter of courtesy though of course it is that. It is that if you treat people dreadfully they are more liable to make mistakes. And as we now see, HM Revenue & Customs have made a corker.

Double-dip or a slow-down in growth?

Anyone wanting a cool and detached perspective on the whole "double-dip" debate will have an opportunity tomorrow, with the publication of the new OECD assessment for the developed world's economy.

I always find this helpful not because the OECD's economists are more right than their peers – they have for example been too pessimistic about the UK on occasions and like most mainstream economists failed to catch the severity of the recession. Rather it is because they give a good snapshot of the current mood in finance ministries and central banks around the world.

The thing to look for will be whether the OECD's economic team are more or less optimistic than they were at the time of the previous exercise in May. Then the mood was more optimistic than it had been late last year. Now I suspect there will be some downgrades – though perhaps not for the UK, whose growth next year was expected to be 2.5 per cent.

So a "double-dip"? That will depend on your definition, but expect more caution about a slow-down of some sort or other.


For further reading

OECD Economic Outlook No. 87, May 2010

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