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

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

Recruitment Genius: Panel & Cabinet Wireman

£20000 per annum: Recruitment Genius: Panel Wireman required for small electro...

Recruitment Genius: Electronics Test Engineer

£25000 - £27000 per annum: Recruitment Genius: An SME based in East Cheshire, ...

Recruitment Genius: Marketing Assistant

£18000 - £22000 per annum: Recruitment Genius: Do you have previous experience...

Recruitment Genius: Accounts Administrator

£16000 - £18000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Read Next
Shia LaBeouf is one of Brad Pitt's favourite actors in the world ever, apparently  

Shia LaBeouf to Luis Suárez: Introducing my anti-heroes of 2014

Ellen E Jones
Gwyneth Paltrow and Coldplay's Chris Martin “consciously uncoupled” in March  

My best and worst stories of 2014

Simmy Richman
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?
Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

Finally, a diet that works

Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
Say it with... lyrics: The power of song was never greater, according to our internet searches

Say it with... lyrics

The power of song was never greater, according to our internet searches
Professor Danielle George: On a mission to bring back the art of 'thinkering'

The joys of 'thinkering'

Professor Danielle George on why we have to nurture tomorrow's scientists today
Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

Monique Roffey interview

The author on father figures, the nation's narcissism and New Year reflections
Introducing my anti-heroes of 2014

Introducing my anti-heroes of 2014

Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
DJ Taylor: Good taste? It's all a matter of timing...

Good taste? It's all a matter of timing...

It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

How we met

Olivia Jacobs and Ben Caplan
Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

Bill Granger's healthy breakfasts

Our chef's healthy recipes are perfect if you've overindulged during the festive season
Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

Who does your club need in the transfer window?

Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

Michael Calvin's Last Word

From aliens at FA to yak’s milk in the Tour, here’s to 2015