End universal benefits and cut tax to rebuild UK future

THE pre-Budget period is often typified by a cacophony of measures, ranging from the incisive to the interesting to the idiotic. But a focus on individual measures can cause us to lose sight of more fundamental themes.

As such, I want to talk about the “why” in the economic debate, not only the “how”. Our policies should be about the behaviour we want to encourage, not just how much money government can raise. We must talk about wealth creation, not just measuring growth. And we have to explain how, by ending the principle of universal benefits, we can reduce costs and cut taxes without diminishing the security on which the most vulnerable depend.

HISTORY AND POLITICS

In 1997, Labour inherited a balanced budget. What happened? Gordon Brown raised spending from £309bn in 1997 to £647bn in 2010 – from 40 per cent to 52 per cent of GDP, the fastest growth in public spending in Europe. Even with the coalition’s deficit reduction plans, debt will reach £1.4 trillion in 2015. Brown spent with abandon, rolling out the socialist vision of a big state. Worse, he pushed welfare addiction to more and more people, ensnaring even the affluent middle classes.

Since 2010, the Conservative-led coalition’s progress has been encouraging. A quarter of the deficit has gone; over 1m private sector jobs have been created and we’re reforming education and welfare to make Britain more competitive. But the LibDems seem resistant to cutting welfare further, and too few subscribe to the supply side reforms we need to inspire meaningful growth.

At the end of this financial year, public sector net debt will be around £1,200bn and we will pay over £47bn in interest. This isn’t because we tax too little, but because we have spent, and continue to spend, too much. And despite reform, welfare spending is still forecast to grow by £5bn over the next two years.

There is, therefore, a need for extended downward pressure on expenditure. We know we live in a competitive global economy, but how many realise the global economy has grown by 55 per cent in real terms since 2000 – from $32.2 trillion to $69.7 trillion in 2012? We are not sharing in this because we are over-taxed, over-regulated and we spend and borrow too much. As such, we must aim to freeze spending for at least three years. In three years, this would see spending £70.4bn lower, not just funding tax cuts but taking chunks out of the deficit. If we froze spending for five years at 2012-13 levels, annual spending would be £91.2bn lower in 2017-18. The cumulative saving over five years would be an incredible £345bn.

Britain is at its best when government is small. By leaving money in people’s pockets, economic activity follows. And as the economy grows, we can split the proceeds between deficit reduction and tax cuts. But we must ask whether ringfencing departmental budgets makes sense in a period of prolonged austerity.

WELFARE REFORM

Further, we need to tackle the extension of “welfare-ism” into the lives of millions, where it has no place. We must begin a systematic dismantling of universal benefits and turning them into tax cuts. We could scrap taxation of income from cash savings in the bank, for instance, which represents barely 0.5 per cent of tax revenues. This would benefit pensioners with savings, paving the way for means-testing winter fuel allowance and other benefits enjoyed by those with wealth that should leave them clear of the welfare safety net.

Of course, tax and benefits are complex and we must ensure we can provide for the needy, while not penalizing those who make provision for themselves. Any benefit should fulfil two basic tests. First, we have to encourage the principle that, when people can, they should put something away to guarantee their future security. But secondly, people will be loth to do this unless a sufficient proportion can be passed on to the next generation.

Difficult though it is, balancing welfare changes against tax cuts has three benefits. First, and most importantly, it leaves money in people’s pockets. The second is a reduction in the number employed to take money from you in tax only to hand it back to you in benefits. Finally, it changes the terms of the political debate. Instead of being challenged by Labour over what we would spend more on, we would challenge them to tell us which tax cut they would reverse. We’d be defying them to cut the budget that matters most – the budget of hard working families.

STRUCTURAL TAXES

But where will growth come from? We know it cannot come from government spending. Higher spending would stifle the wealth creating part of our economy. But we could do more to attract investment. Although we have natural advantages in our location, language, time zone, legal system and culture, we also have self-imposed limitations. Money will go where money can be made. That is why capital gains tax (CGT) is such a problem.

The rise in CGT in 2007 led revenues to fall from £5.3bn to £2.5bn in 2009-10. Analysts agree that a CGT increase disincentivises investors realising assets. If possible, I would like to see CGT reduced to zero for a period before being reintroduced at a sensible level. This would create a tax window where investment in capital becomes more attractive. There may be an initial fall in tax revenues, but that would be balanced against jobs created and increased business.

Take an example. According to the latest census, 2.6m own a second home. Supposing one third would like to sell, but haven’t because they will lose 28 per cent of the capital gain in tax. With a zero CGT window, this could result in 750,000 properties coming to market, with effects on stamp duty, retail sales, and an effect on the building industry.

REPEAT TAXATION

My final point also relates to the creation of a savings culture and the iniquity of the state taxing the same income multiple times. We pay tax on income. If we behave responsibly and save, we are taxed on that. If we invest, we may be hit by stamp duty or capital gains tax. Finally, if we have the audacity to die, the state taxes again.

This is deeply immoral. It should be a matter of principle for all who wish to encourage thrift, self-reliance and the principle of equity that we should move towards the reduction, or even abolition, of taxes that hit the same money on multiple occasions, and which discourage the behaviour that would lead to a more responsible society. This is the crux of the issue. Taxation must be judged not only by the ringing of the Treasury cash registers, but by the type of behaviour it engenders.

The policy we set out in the Budget – particularly the way we tax people – is the compass from which all

Conservative policies find direction. The system we inherited is the legacy of one of the most cynical economic policies ever deployed. Margaret Thatcher empowered through the sale of council houses, while Brown subjugated through a scandalous expansion of the welfare state, by over-complicating tax and benefits until they became an impenetrable labyrinth of forms.

It is time that we set a clear philosophical course and rebuild an economy that is leaner, more agile and better prepared to compete in the modern world. We must, again, encourage people to dream of a better life for themselves and for their children. We must encourage them to believe that their future lies in their own hands and not in the hands of a bloated state. Where they aspire, let us bring them opportunity and they will build a better tomorrow for Britain.

Dr Liam Fox is Conservative MP for North Somerset. This is an adaptation of a speech he made to the Institute of Economic Affairs.