Rates review will send out a strong signal

Mar 19 2008 by David Rosser, Western Mail

MY usual leisurely Sunday morning with the papers was a bitter-sweet affair this week. The temptation to turn straight to the sports section was understandable and the extensive and glorious coverage of Wales’ grand slam triumph took me through the coffee and toast and well beyond.

But eventually I had to turn to the business and finance sections and the aftermath of the Budget was the main subject, with the usual roll call of winners and losers.

At a time when the Government’s main priority is to raise cash and try to balance the books, it is perhaps unsurprising that no group seemed especially happy with the outcome.

The public finances certainly need repairing, but the Chancellor decided to take all the pain on the tax side of the equation, with no restraint on the spending totals.

The pain will be shared between the business and household sectors, and will build to an additional £3bn in taxes in 2010, on top of the effect of changes announced last year and coming into effect next month.

Much of the media comment over the past week has centred on the cumulative impact on individuals of tax increases on top of an inflation rate for householders that is running much higher on non-discretionary spend than the official headline figure.

And the political impact of the growing tax burden, and the rapidly diminishing feel-good factor in middle Britain, is also apparent. If Dan Parks thought he was an unpopular Scotsman after reading the papers this weekend, he had only to look at the scorn poured on Alistair Darling, above, and Gordon Brown’s popularity rating, to gather some comfort.

What concerned me professionally about the reaction to the Budget, as compared to my personal dismay at the extra duty on wine, was the feeling among some of the commentators that business had somehow “got away with it”.

There were plenty of callers to phone-in shows, and letters to editors, commenting on the UK’s “low” corporation tax rates, complaining at the back down on the non-dom issue, and calling for the energy companies to have a windfall tax applied. And these did not all seem to be from the Socialist Worker fringe. Middle Britain is being squeezed and looking for others to share the pain.

The recent CBI report on the UK’s tax competitiveness shows that our business tax burden is actually growing and that we are slipping down the international league tables.

This Chancellor and his predecessor have performed the same trick on the corporate sector as on hard-working families – keeping the headline rates low but changing allowances and a myriad other rules so that the overall burden increases steadily.

We have gone in a decade from fourth to 15th in the global competitiveness index. And, like the household sector, we have seen much vaunted headline policies reversed when the going got tough – 10% personal tax band and 10% CGT (capital gains tax) both scrapped.

And this leaves the politicians with a real conundrum. Squeeze individuals too much and they stop voting for you. Squeeze companies too much and they just stop making profits or make them somewhere else.

The alternative is a course of action that governments seem to find even harder, but which we are all well used to as individuals managing budgets – if your money runs out, stop spending or start buying smarter. Is government money being spent on the things that really matter and, critically, is it being well spent or is some of it being wasted?

This is going to have to be the focus of government thinking in the coming years. And, of course, it is simplistic of me to draw comparisons with household budgets – though at least this puts the situation in terms with which we are all familiar, should politicians ever trust the electorate enough to explain that we can’t have lots of freebies and low taxes simultaneously.

So where does this leave Wales? At the moment with the current devolution settlement, the Welsh Assembly Government only deals with one side of the Budget equation. It only spends, and has no responsibility for raising its own cash. It makes choices between spending priorities, and tries to achieve best value for money.

I come across politicians in Wales who argue that the Assembly should have its own tax-raising powers, and that would certainly give a better balance to the political process in Wales and a more rounded contract between the Assembly Government and the people.

But looking at the situation in which Alastair Darling and Gordon Brown find themselves at this time, you could forgive the Assembly for keeping their heads down on this one and working with the status quo.

And Assembly tax-varying powers over the business community would create an interesting dynamic. Every politician I have met who wants these powers tells me they would reduce taxes and increase Wales’ business competitiveness. And every business person who hears that story looks at what happens to business taxes when the going gets tough and visibly pales. The Assembly’s forthcoming review of business rates will send a strong signal.

Taxation is ultimately a matter of trust. Government requires people to pay in order to fund services that are better provided at a collective level. Taxpayers trust government to raise only the tax that is needed, to raise it fairly and to spend it well. We need to build that trust between business and the Assembly in Wales.

The Assembly’s forthcoming review of business rates will send a strong signal.