The annual Budget is regarded as a grandstand event in the UK parliamentary year. This reflects our centralized political system. In most economic circumstances, the Budget should be a rather mundane statement of how public spending commitments will be financed. It is the occasion to lay out how much the government needs to borrow (or how much debt it can pay back) and set the tax rates that are necessary to finance that spending.
However, in the UK political system, the ministers have enormous power, because they are also part of the legislature. And when it comes to Budget day, the Chancellor of the Exchequer has almost untrammelled powers to propose changes to taxation, government spending, and almost any other policy he chooses. He tells the cabinet what will be in the Budget on the morning of the presentation, and he is almost beyond challenge. Furthermore, the Budget cannot be scrutinized by the House of Lords.
The opportunity presented itself – and was missed – to help solve some of the UK’s deep-seated economic problems.
It is this background that leaves me with mixed feelings about this week’s event. By any account it was a boring Budget. In some sense, this is how it should be. However, the opportunity presented itself – and was missed – to help solve some of the UK’s deep-seated economic problems.
First, the issues that should be the “bread and butter” of the Budget: If there were an Olympic gold medal for the worst tax system, the UK and the U.S. would be going head-to-head. The U.S. tax system is deeply dysfunctional and economically damaging. The UK has the longest tax code in the world – four times the length of the King James Bible. All recent Chancellors of the Exchequer have used Budget day to announce tax gimmicks to attack groups who get bad press (such as “buy-to-let” landlords), or to give special tax exemptions to groups favoured by the media.
For example, due to a recent Budget change, if a couple buys a second house - perhaps for their child - they have to pay an extra rate of stamp duty (the tax that is paid on the purchase of the house) of three percent. If the couple is not married, they don’t have to pay the extra tax. And due to a succession of changes, a tax which used to be levied at a single low rate on all house purchases over a certain price now has the following variations (amongst others): four different rates of tax, different treatment of companies and individuals, different treatments of charities and trusts, different treatment of married couples and unmarried couples, different rules for people who own more than one house, and different rules again for those who own more than six houses! The top rate is now an astonishing 12 percent. Whole chapters of the tax code have been developed to deal with anomalies that might arise, such as if a couple buys a house and doesn’t quite sell their existing house in time so that, for a short time, they have two houses.
Whereas back in 1997 we had one of the simplest systems of income tax in the world, today as your income moves through the tax brackets you will be taxed (successively) at zero percent, 12 percent, 32 percent, 42 percent, 62 percent, and 47 percent.
These two relatively simple absurdities are chosen, because most of the complexities of the UK tax code are too difficult to explain in an article. Our tax system can now be difficult to navigate even with a competent accountant.
Taken together, the UK’s tax and benefit systems discriminate against family formation.
On Wednesday, Philip Hammond had an opportunity to improve things, but it was an opportunity he chose not to take. The only significant tax measure he announced was to reduce the rate of stamp duty for young people – once again creating an exemption from the general tax rules under pressure from the media. In another attempt to ingratiate himself with young people, cheap train fares were announced for those between the ages of 25 and 30. This measure is, quite frankly, ridiculous – and has been received that way.
The Chancellor also announced new public spending promises and deferred yet further the day when the Budget will be balanced.
But, what about the big stuff – the policy announcements that shouldn’t be in Budgets but these days always find their way in? Living standards have stagnated for a decade, and young people fear being worse off than their parents. In particular, the younger generation cannot afford to buy a home of their own. There is one simple explanation for this. Our land-use-planning (or zoning) system does not allow the building of new houses. This pulls down living standards, creates social problems for the poorest, and reduces productivity and economic growth. Instead of measures to liberate people to build much-needed houses, the Chancellor merely announced some more micro-interventions to threaten builders into building more structures, as well as some wholly unnecessary government investment in housing.
The UK tax and welfare system undermines the family as the most important vehicle for the provision of welfare.
So, what about the ethics of all this? It has to be said that it is difficult to identify overriding ethical issues. It is not that the Chancellor did anything especially evil (or virtuous). However, he chose not to take decisions that could make a real difference – joining a long line of Chancellors who have put avoiding a potential media backlash ahead of making bold, forward-thinking economic reforms. Adam Smith’s canons of taxation – equity, certainty, economy, and convenience - need to be restored, and it would take real political integrity and courage to put this above short-term political expediency. The UK's Budget will not be balanced in the foreseeable future. There are real issues of intergenerational justice here.
Furthermore, as was revealed in a recent report by the think tank Care, the UK has a tax system which is extremely unfavourable towards single-earner couples. Additionally, taken together, the UK’s tax and benefit systems discriminate against family formation.
This latter feature of the UK tax and welfare system undermines the family as the most important vehicle for the provision of welfare. The family and not the individual should be the basis of taxation.
Finally, (though not directly the responsibility of the Treasury) the government has once again made no decision to allow much-needed houses to be built - the only long-term solution to the housing shortage - because it will annoy traditional Conservative voters who live in leafy areas. Of course, the result of this decision to protect the interests of those who already own a house is to turn young people toward favouring extreme forms of collectivism – despite the fact that the problem is caused by our collectivist approach to housebuilding.
Allowing each of these problems to go unaddressed could perhaps be described as “sins of omission.”
It should be said that the degree of culpability is limited by parliamentary arithmetic. Theresa May’s decision to call a general election earlier this year leaves the government without a majority. In these circumstances, implementing much needed change requires the virtue of political courage being united with the gift of political imagination. It is not clear that the government has either.
(Photo credit: U.S. Department of Defense. This photo has been cropped. CC BY 2.0.)
