Hamish McRae: What if revenues fail to recover?

Share
Related Topics

Could the UK become the new Japan? The two bits of news that spark that question are the public finance figures for June, released yesterday, and the creation by the Chancellor of this new Office for Tax Simplification. The June numbers are disturbing, for they show that the apparent recovery in tax revenues seems to be petering out, while the latter matters because a radical simplification of the tax system may be the only way the Government can generate enough tax to dig its way out of the fiscal catastrophe it inherited.

The parallel with Japan first, for if you add all the debts of the UK – government debt, company debt, personal debt and so on – we join Japan at the head of the league table of shame. The composition of the debt in the two countries varies, with public debt being bigger in Japan and personal debt being smaller, but in both countries total debt is more than four times GDP.

But now look at something else. I was aware, as most of us are, that Japan had experienced two decades of stagnation, with wealth rising very little or not at all, but I had not fully appreciated the damage that slow growth had done to tax revenues. A couple of weeks ago the Japanese finance minister reported that revenues for the last fiscal year, the one that ended in March, were Yen 38.7 trillion. That was actually a little higher than had been feared, but was still the lowest since 1986. Yes, 1986. Back in 1990, at the end of the boom years, they were Yen 60 trillion and since then there has been more or less steady decline. It is true that this is the central government tax take and there are other local taxes, but the broad picture is of a public sector that has to manage with less money coming in each year.

We are not used to that. Revenue has plunged over the past three years but the explicit assumption in all the budget forecasts is that it will recover. Yes, everyone accepts that we have to cut public spending and the only area of debate is about the speed at which that should be done. But the numbers only add up if you also assume that revenues will recover. What if they don't – or at least not to the extent expected?

We are only one quarter of the way into this fiscal year but the fiscal numbers don't look great. The Government had to borrow £42.4bn in the three months to end June, whereas last year it had to borrow "only" £41.4bn. This period does relate to policies under the former regime and the emergency Budget was not until 22 June. Nevertheless it has been a period of some growth, which is more than can be said of these three months last year. My worry is not that the Government is failing to control spending, for it is too early to expect much to be happening on that front. Rather it is that revenues are weakening and may weaken further.

For the first two months of the financial year revenues were decently up on 2009 but in June, though VAT was up, income tax revenues were flat. We will have to wait for some months to be sure but what may have been happening has been that people have been bringing forward purchases ahead of the emergency Budget to escape a possible rise in VAT. They may also have been taking capital gains to get the benefit of the 18 per cent rate, in the correct anticipation that this would be increased. That would explain the strong numbers there.

As for the weak income tax figures, people may now be starting to cut their income in response to the rise in the top rate of tax to 50 per cent.

To many people that must sound a bit odd – people just cutting their income – because that is not what most of us would choose or even be able easily to do. But you have to remember that a quarter of income tax revenue comes from the top 1 per cent of earners and many of this top group do have flexibility as to whether to take income or not. If they own their own businesses, for example, they can leave the money in the business. A few are moving offshore, which is hard for UK citizens but easy for non-nationals. (I see that JP Morgan is relocating its head of international business to New York because of the high personal taxes in the UK.) We don't know what the leakage will be but it is perfectly possible that three or four years down the line, income tax revenues may actually be lower than they were last year.

So there will be huge pressure on improving the tax system so that we get the revenues in but don't encourage people to move out, or simply not come here in the first place. That is where the Office for Tax Simplification comes in.

I find here a bit of scepticism coming on. I can't quite see why you need an office to make things simpler. Why not just stop complicating them in the first place? We no longer have a Chancellor with a compulsion to fidget. Remember all those little announcements that Gordon Brown used to scatter like a condiment over his Budget speeches? There is a huge case for radical simplification, not least because even the revenue can't cope with the present system but that should be mainstream, not something bolted on the side. Still, since we have it, its mission should surely be not just to simplify the system but to tune it so that we increase our chances of avoiding the plight of Japan.

h.mcrae@independent.co.uk

For further reading

'The Mystery of Capital', by Hernando do Soto (Basic Books, 2000)

React Now

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Junior Web Designer - Client Liaison

£6 per hour: Recruitment Genius: This is an exciting opportunity to join a gro...

Recruitment Genius: Service Delivery Manager

Negotiable: Recruitment Genius: A Service Delivery Manager is required to join...

Recruitment Genius: Massage Therapist / Sports Therapist

£12000 - £24000 per annum: Recruitment Genius: A opportunity has arisen for a ...

Ashdown Group: Practice Accountant - Bournemouth - £38,000

£32000 - £38000 per annum: Ashdown Group: A successful accountancy practice in...

Day In a Page

Read Next
Ed Miliband and David Cameron  

Cameron and Miliband should have faith in their bolder policies

Ian Birrell
Andreas Lubitz runs the Airport Race half marathon in Hamburg on 13 September 2009  

Being sensitive to mental health need not lead us to downplay the horror of what Lubitz did

Will Gore
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing