If the Chancellor is looking to secure his legacy ahead of the General Election, he should use next month’s Budget to fix the thresholds and cliff edges that are distorting the economy, argues Tim Sarson
Budgets are almost as much about political theatre as they are about policy, especially in the run-up to a general election. So it’s tempting for a tax expert like me to leave the speculation to the Westminster pundits. After all, I don’t get Whatsapp messages from “senior Tory sources” telling me that Inheritance Tax is definitely going this time, or it’s not, or that there was a furious row in Cabinet about this or that.
But with less than a month until what will likely be this government’s last major fiscal event, let’s pause and consider what Jeremy Hunt might decide to prioritise. There will of course be red meat for the electorate, but given the grim economic context, any exuberance with tax cuts risks looking irresponsible.
But as well as electioneering there is also the question of legacy. Now is the time to fix those things that everyone knows needs fixing. You might as well try. It may not win an election, but it might win you posterity points when the postmortems come in. So, I’m predicting a few interesting little reforms to the tax system next month.
There are several oddities that need addressing, some easier said than done. First and most urgent is the fiscal drag successive chancellors have subjected taxpayers to by fixing thresholds. With inflation subsiding a little, now is the time to unfreeze them. It’ll be expensive, but will give voters a tangible benefit in their pockets in an election year.
Less expensive but more complicated is dealing with the big distortions and cliff edges in the tax system that are keeping people out of the labour market and preventing businesses from growing. Hunt made a start last year with the abolition of the pensions lifetime allowance, but there are bigger distortions still remaining.
For individuals the most troublesome income bands are around £50,000 when parents face the 40 per cent higher rate combined with the High Income Child Benefit Charge, and just above £100,000 where the personal allowance starts to taper. Both could be eliminated by dropping those tapers or raising the level at which they kick in, but of the two the £50,000 child benefit charge is more of a vote winner. It would cost money but bring marginal rates to more sensible levels.
The £85,000 VAT threshold is another well-known cliff edge, but that’s a much tougher nut to crack. Reduce it, and thousands of small businesses owners won’t thank you. Increase it and you just push the problem further up the turnover bracket. But ministers rarely hesitate to kick cans down the road, so watch this space.
Finally, there are the two big discrepencies in how different types of income are taxed. Capital Gains attract much lower rates than earnings, and the self-employed are taxed more favourably than employees. Both
drive odd behaviour in parts of the economy. Fixing either creates winners and losers, but it needs doing at some point.
Does that mean no other headline-grabbing giveaways? I’m sure there will be something, it is an election year after all, but I just can’t see abolishing Inheritance Tax or dropping the 45p additional rate being politically palatable. At least not in the spring. A final legacy move? I think he’d quite like to get the Corporation Tax rate below 25 per cent again. It would win few votes, but it might win the country a few more investment dollars.