Getting the economy going: cut public sector waste and transform taxes

By now the causes of the economic crisis, and the course of its swift global trajectory, have been explored ad nauseam. But while its bitter consequences are being experienced for a year or three there is much that governments can learn from enforced austerity.

The mechanics of the recent explosion in government borrowings are simple enough in theory: it is assumed that the “markets” will gratefully mop up all the gilts that are thrown their way, and with all this new money the Treasury can finance tax give-aways and confidence-boosters designed to restart spending.

Yet it may not be so simple to persuade the markets to buy UK government debt. Having convinced the heads of all major economies that our brand of restorative strategy is the one to follow, our government may find that the global markets now have investment choices that leave Britain far down the list. Its serious trade deficit, heavy dependence on the financial sector and a falling currency could spark real fears about solvency, in turn pushing up the cost of all that borrowing.

 Did no one in the Treasury see this coming?

On the domestic front, even those targeted to benefit from the trifling cut in VAT from 17.5% to 15% agree that it will have zero-impact on consumer spending impulses, yet will hit hard-pressed small businesses with an unwelcome administrative cost. Did no one in the Treasury see this coming? What about the undertaking to raise employer’s NI contributions in 2011? And the lurking threat to raise the VAT rate to 18.5%? And the return to redistributive economics implied by the jump to a 45% tax rate for higher-paid? Is there no coherent fiscal intelligence at work?

Real opportunities

It’s not too late to recognize the real opportunities that this recession affords. The first is to re-think, fundamentally, the way in which government revenues are raised. The second concerns the profligacy with which tax revenues are squandered on projects destined to fail from the start.

The two principal contributors to the UK Exchequer are VAT and income tax. The first is not a tax on value added; it is a tax on consumption. It is based on the value added at each stage of the supply chain but it is passed on until it hits the consumer, the fall-guy who adds no value but just pays the artificially inflated price. This is the consumer on whose diminished spending powers the government has pinned its hopes for economic recovery. Yet to abolish this most terrible of all taxes would be a breach of European law.

Income tax, as collected via PAYE, is also misnamed. It is not a tax on income; it is a tax on employment. It is based on a mythological creature called “gross pay” which no employee to this day has ever seen. Once calculated, it is the employer who, every month, has the legal liability to cough up the tax, as well as that other misnamed employment tax, “national insurance”. Those whose employment is endangered by this tax penalty are, of course, the very same VAT-penalized consumers referred to above.

The absurdity of this administratively grotesque charade is most obvious when tax is “deducted” from millions who are paid by government and then, well, “remitted” back to government! As I said, this pernicious machinery is screaming out for a fundamental re-think.

Axing waste

After nine years the Regional Development Authorities can boast no palpable achievement – unless you count paying chief executives more than the Prime Minister. English Partnerships is a quango that largely duplicates the work of the RDAs, yet pays its chief £220,000. Agencies designed to eliminate government inefficiency have rather learnt to replicate its extravagance. We can’t afford them, so put them on the axe-list.

Then throw in any bogus pressure groups – Postwatch, National Consumer Council, Energywatch – whose abolition would lose us nothing and save billions. Only by culling its army of unproductive non-medical consultants can the NHS budget grow where it’s needed. Twenty years ago the Grace Commission on efficiency of US government spending reported that one-third of income tax was consumed by waste.

But now, in all conscience, when people with real jobs are facing the axe, it must be time to light the big bonfire of all redundant pseudo-agencies and save over £30 billion every year. Otherwise, what hope of a return to the principles that taxes are needed for essential government expenditure, and that only through lower taxes will the tax base begin to grow again.