Yesterday’s Budget contained very few surprises. Much of the content had been pre-released, including the brighter outlook for public finances. But one detail that had not been heavily trailed – for obvious reason – is the bleaker prospects for economic growth.
The recent run of forecast-beating tax receipts, with self-assessment and corporate taxes in particular coming in much more strongly than expected, sits in stark contrast to the performance of the economy more broadly, which has disappointed even relative to the March forecast. We have now been sluggishly at the bottom of the G7 league table for growth since the third quarter of 2017. With another year added to the forecast period this time, we now know that, as far into the future as 2023, we shouldn’t expect economic growth to be any more impressive than 1.6 per cent a year. What’s more, since it’s highly unlikely that we can continue to grow by expanding employment, even that meagre forecast is contingent on us finding productivity growth from somewhere – something that our stalling investment growth will make progressively more difficult.
Against this backdrop, it seems foolhardy to put a portion of the fiscal windfall of the past few months towards cutting taxes. But that is exactly what the chancellor has done in this, the final Budget before we exit the European Union.
Increasing the personal allowance and higher rate thresholds a year earlier than would have been necessary to uphold the government’s manifesto commitment smacks of hubris. And as has been demonstrated conclusively by the Resolution Foundation, using the IPPR tax-benefit model, this is a tax cut that benefits richer taxpayers while giving no assistance to those on the lowest incomes.
The chancellor could have found the money for increased spending on the NHS, social care and universal credit by other, more reliable means. Rather than spending on the basis of a fiscal forecast that may or may not come to fruition, he could have gone for bolder changes to match the scale of the challenge.
The IPPR Commission on Economic Justice recommended taxing income from wealth at the same rates at income from work. This makes intuitive sense: why should income earned from equities or property be taxed at a lower rate than the same amount of income earned from working? Under one of Philip Hammond’s Conservative predecessors, Nigel Lawson, they were taxed the same; and so they should be now.
The tightening up of tax reliefs on capital gains tax payable by landlords is a positive step, but does not go far enough. Under our proposals, capital gains and dividend taxes would be scrapped and instead all wealth income would be taxed under the income tax schedule.
We also want to see an end to the current method for taxing inheritances, taking the liability off the giver of the inheritance and onto the recipient, which would dramatically reduce the potential for tax avoidance. We recommend the introduction of a lifetime gift tax, with gift recipients entitled to a £125,000 lifetime personal allowance, and any subsequent gifts taxed under the income tax schedule.
And the chancellor missed an opportunity to halt the reductions in corporation tax from 19 per cent to 17 per cent. The Commission on Economic Justice argued that he could raise corporation tax to 24 per cent and still have the lowest rate in the G7.
Clearly there is also much to do to reconfigure the economy so that it delivers better quality, stronger growth in future. IPPR’s ambition is for a much bigger role for the public sector in driving investment, led by a new National Investment Bank, to raise public investment by £15bn over and above current plans by 2022.
In comparison, the chancellor’s commitments to increase spending on productivity-boosting initiatives and raise the annual investment allowance amount to fiddling at the margins. Other changes, such as the business rates holiday for small retailers and the adjustments to eligibility for entrepreneurs relief, are little more than half-hearted tweaks of fundamentally flawed elements of the tax system.
Hammond had an unusually wide range of options available to him, given the recent good news on tax revenues. Unfortunately he chose quick political wins, rather than thinking more profoundly about the lessons we need to learn from our sluggish economic performance, and the ideas that could deliver a more prosperous and just economy.
Catherine Colebrook is chief economist at the IPPR think tank. This article was jointly written with Carys Roberts, senior economist at IPPR
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