The consequences of populism: a closer look at George Osborne’s taxation plans

Autumn Statement 2014 - HM Treasury

Autumn Statement 2014 – HM Treasury

George Osborne’s Autumn Statement was a master class in shrew political populism, of the kind that has become typical for the strategist best placed to succeed Mr Cameron in the future. Since the 2012 ‘Pasty Tax’ fiasco, the Chancellor has been sure to sweeten his statements (and budget cuts) with easily accessible policies that cast a wide net of support- and avoid that ridicule. Individually these policies can be welcomed. Looked at together, and the program appears determined to narrow the tax base, minimally benefit the average citizen, and pave the way for the most dramatic spending cuts since the creation of the welfare state.

First, let’s look at the headline event, the stamp duty charge. Again, demonstrating tactical politics at its finest, Osborne singlehandedly lowers the cost of house buying, fix an unpopular charge, discredit one of Labour’s signature policies (the ‘Mansion Tax’), and charge the ever-unpopular rich more. Yet what is the reality?

As has already been pointed out, the upshot of a lower stamp duty is that house prices will rise to accommodate the extra money buyers can now spend. This will be particularly true for the houses that have artificially been kept just below the thresholds previously. All this serves to do is keep buoyant an already overheated housing market. But there is a more fundamental problem. As George Osborne himself boasts, this will save 98% of house buyer’s money.  Leaving aside the former point that the prices of houses will now likely rise to minimise the amount of people saving, it also means that tax receipts will be even more focused on the higher end, narrowing the tax base. As this is necessarily focused in London, it also raises questions about an overreliance on what is already a demonised growth engine, and could lead to calls for greater devolution for the capital (London Standard), at least with what it does with its disproportionately high tax receipts.

The Chancellor has been sure to sweeten his statements

The Chancellor has been sure to sweeten his statements

The next notable policy is the expansion of the personal tax-free allowance. Again, another smart political idea, that saves the average worker money, extends the top income tax band, and is a policy that’s very difficult to criticise politically- it’s a policy that rewards and encourages people for being in work. More populist, and certainly less sensible, is the abolition on air tax for children on economy flights. Welcomed by the travel industry, it’s a tax that’s put off little to no holidaying Brits in the past- it cost around £26 per child for a trip to Europe- saving very little per person, but costing the state certainly more now. Though that is not to say the tax itself wasn’t flawed, but of all the cuts that could have been made, it was a questionable choice.

These are just a selection of the taxes in this statement that are popular attempts to help the average ‘middle class’ Brit. In contrast, to try and increase revenue, the Government has announced plans to tax the ‘diverted profits’ of multinational companies. It’s already been dubbed the Google Tax, and is once again a headline chasing announcement. Yet, it already has won my award for most vague announcement of the season. It’s not clear how it intends to tax 25% of a multinational companies ‘diverted profits’, but one can guarantee that if you’re going to attack such an intricate area of tax law, you need an iron clad solution, designed by the finest tax lawyers, or you’ll end up with a mess riddled with more holes than Swiss cheese. At the moment, it appears an announcement chosen solely for populism, and not practicality.

None of these announcements are fundamentally bad in themselves- many of them are excellent. But the problems that they are likely to lead to are certainly not excellent. The tax base is being shrunk, at a time when low wage growth is already stifling tax receipts: “future tax revenues have been revised down by an astonishing £20 billion“, and this is before any more tax cuts come into effect.

Narrowing the tax base is even more dangerous. Basic economics says that if 10 out of 100 employees are fired, the other 90 can pick up the slack. If there’s only, say, 60 others, that slack is accordingly heavier. Likewise, when 98% of house buyers are paying less tax, the government coffers are reliant on the continued cooperation of the top 2% of buyers and a buoyant housing market at the upper end. And that is merely one example.

The Conservatives were elected on a pledge to abolish the deficit, a problem of moral hazard that only they could fix. It was a claim that was, and continues to be, accepted as the legitimate basis for the government’s austerity program. But as tax receipts fall, borrowing will grow (as has already been predicted for the next two years) and spending will have to be slashed even more to make up for it. With certain spending ring fenced, the state is on course for a dramatic shrinking. One cannot feasibly just keep trimming budgets- the easiest cuts have long passed. No, some departments will have to shut down completely. Some areas will devolve, some areas will be outsourced to the private sector, and some will simply deteriorate.

For those that are fans of small, possibly efficient government, that’s fantastic- though coincidentally those that fall into this camp are rarely the people who need to make use of the services provided by government. But it’s not easily reversible. If that is to be the program, the people should be made clear what the consequences of every sweetened tax cut they get is.

By Alex Diggens, Junior Writer for Daily Political View.

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