Growth by a Thousand Quangos
Happy Monday!
As we gear up for another week of political shenanigans with the parties unleashing more ill thought through policy proposals on a weary electorate I want to focus on comments made last week.
Both Labour and the Tories have ruled out any increases to Income Tax, National Insurance, or VAT if they form the next government. In many ways this is welcome. The tax burden on working people is already far too high with many people struggling with the high cost of living, the last thing we want to see is an even higher proportion of the wages of hard working people appropriated by a greedy government.
Not only have both main parties ruled out tax increases, they have both promised to stick to the same ‘Fiscal Rules’ which would likely mean no increase in borrowing. As I’ve said on here before, politicians and the media get a bit too reverential when it comes to Fiscal Rules as though they were delivered from on high by angels. In many ways the Fiscal Rules are both too stringent and too lax and I think there is a case for the next government to increase borrowing in order to fund investment but this is not going to happen as both main parties are keen to burnish their fiscal credibility credentials.
Such a situation is unsustainable. Labour has made big promises about dealing with NHS waiting lists while also launching Great British Energy. I believe that the answer for improving the NHS does not simply lie in throwing more money at it, instead the organisation needs drastic reform. Unfortunately, reform doesn’t come cheap and so will need a massive injection of cash to kick things off. That money has to come from somewhere.
The temptation of the next government will be to find the cash by introducing a host of stealth taxes marketed as levies on politically unpopular groups such as energy companies, ‘Big Tech’, and the super rich. This would no doubt be coupled with lots of giveaways, reliefs, and exemptions for various groups and worthy causes. The end result will be a funding gap that is temporarily plugged while economic activity is distorted and the tax system becomes even more complicated.
Instead of doing this the next government should abolish the different rates and exemptions of VAT and instead levy a single rate of VAT on everything. I’ve written before on here and elsewhere about the problems caused by our current VAT system and why we need to do this – VAT is one of the least economically damaging taxes and ending all the exemptions would be a significant revenue raiser.
Moreover, we often hear politicians promising to increase the VAT threshold in order to support small businesses as they see the current threshold as a barrier to growth. They are right that it is a barrier to growth but their solution is the wrong one – we need to lower the VAT threshold instead. A significant reduction in the threshold would not only be a boost to the Treasury’s coffers, it would also remove a significant barrier for small businesses and allow them to expand, generate higher profits, and create more jobs. Such a move would be good for the economy and the public finances.
Levying VAT on everything and lowering the threshold would be a significant revenue raiser. Unfortunately it would also obviously significantly increase the cost of living for households. The correct solution here would be to use this extra revenue to fund targeted support for low income households while also cutting or abolishing more economically damaging taxes.
No politician wants to announce that they’re going to levy VAT on baked beans and children’s clothes. It is difficult to imagine a more politically unpopular policy. There would be a massive uproar in the media and all the other parties would unite against it (even if they secretly believed it was the right thing to do).
The solution to this is another quango. Politicians, the media, and huge swathes of the population love to hate quangos as they’re staffed with highly paid and unelected bureaucrats who wield huge power over our everyday lives. However, I think that many of them should have a place in government. For example, I have previously defended the OBR and called for the creation of a Fiscal Policy Committee and a truly independent Board of Trade.
In that vein, it is time to bring back the Office of Tax Simplification (OTS). The OTS was introduced by the Coalition Government in order to examine the UK’s tax system and propose policies to simplify but was abolished as part of the disastrous Truss/Kwarteng mini-budget.
It was hardly the worst thing that the Truss government tried to do but it was still a mistake. The Conservatives are suspicious of quangos as they think they’re staffed by woke communists determined to bring down the elected government. While I cannot speak for all quangocrats, this was not my experience of the OTS. I met with them a few times, including while I was working for the famously left-wing TaxPayers’ Alliance. I found that the OTS was keen to see policies introduced which would simplify the tax system and in so doing also reduce the burden on households and firms while also boosting growth. Unfortunately the OTS was based in the bowels of the Treasury and had very little power and so its recommendations were routinely ignored.
A resurrected OTS has a lot of potential. Staffing it with experts who actually understand the tax system, raising its profile, and introducing a provision that the Chancellor would have to explain to Parliament why he or she ignored their recommendations would all help to increase its influence. A savvy politician could cultivate a relationship with it similar to that of business leaders and McKinsey (know the right policy but use the OTS as a shield to suggest it because it would be unpopular but they are the impartial and independent experts). Bringing back the OTS under these terms would increase the likelihood of the country getting a much better tax system.
Thanks as ever for reading. I currently have more time and freedom to write so I’ll be mouthing off on here and in other publications more frequently during the election campaign. If you enjoy this blog and would like to see more posts then feel to bung some dosh my way: https://buymeacoffee.com/opportunitylost