Prior to #bigotgate, I had hoped that the world would tune in, agog, to my take on the IFS’s take on the fiscal situation.  Fat chance now. (I think the best observation comes from my favourite tweeter.)

Anyway, back to business.  You will have read commentary such as this from the Guardian which tends to gather round one point: none of the parties have revealed anything like the scale of the cuts that are needed.  True, but realpolitik makes this impossible.  The first to reveal how many Sure Starts they will close/nurses they will fire/tax credits they will freeze will be victim to the other parties’ leaflets – and people don’t look at leaflets like they do an IFS report on all the parties plans, reading between the lines.

As Westminster Blog observes, parties can make spending pledges worth billions in just a matter of minutes; but eking from them a fraction of this in spending cuts is sheer murder, even when it is a mere dent. Staying shtumm is a no-brainer, politically.

The IFS is playing a blinder.  It cannot be ‘bought’ or leant on.  It still leaves me a bit mystified about what the Conservatives’ OBR would do.  Robert Chote’s remarks are all that most of us need to read. They have some very LibDem friendly highlights, or points of general interest:

On the overall shape of plans

  • [Conservative plans] would not make an enormous difference to the long term outlook for the public finances. The Conservatives would still end up borrowing £604 billion over the next seven years, just 6% less than Labour and the Lib Dems.

On its composition

  • Labour favours a ratio of 2 to 1 between spending cuts and tax increases, the Lib Dems 2½ to 1 and the Conservatives 4 to 1.

BUT

  • it is worth noting that when the last Conservative government faced the need for a big fiscal tightening in the early 1990s, we estimate that the ratio of tax to spending cuts was roughly 1 to 1 [so this surely makes the Conservative plans the least credible in terms of ‘doability’ (rather than attractiveness)]
  • When David Cameron said of the Liberal Democrat income tax cut in the first debate “It’s a beautiful idea. It’s a nice idea. We cannot afford it” that is a slightly odd accusation for a party advocating a net tax cut to make of one advocating a net tax increase.

On the scale of cuts

  • Labour and the Liberal Democrats would need to deliver the deepest sustained cuts to spending on public services since the late 1970s. While, starting this year, the Conservatives would need to deliver cuts to spending on public services that have not been delivered over any five-year period since the Second World War.

On Taxation

  • The Conservatives would make the pattern less progressive, reducing the losses of households at the top of the income distribution proportionately more than those at the bottom.
  • The Liberal Democrats would make the pattern more progressive, redistributing resources from the wealthy to middle-income households (though not the poorest).
  • Conservative plans would strength the incentive for many people to be in paid work at all, but would do almost nothing to encourage most existing workers to earn a bit more.
  • The Liberal Democrats would probably strengthen the incentive to be in paid work for more people than the Conservatives, as well as increasing the incentive for those earning less than £10,000 to earn more. But they would do more than the other two parties to harm incentives to work and save among richer households.

On complexity

  • The Conservatives would not improve matters. They would partially reverse what is probably Labour’s least bad tax increase and add new complexities and distortions of their own.
  • The Liberal Dem package would remove some undesirable distortions and inconsistencies of treatment. But their plan to restrict pension contribution relief is misguided.

Overall verdict: LibDem plans are more realistic and progressive than Conservative ones, leave the debt position roughly the same, distort the tax system less, involve deep spending cuts but unlike the Conservatives don’t involve breaking an all-time record.

I hope Nick reads this carefully before the Economy debate.  ‘I agree with the IFS’ …

What are the major Lib Dem weaknesses? (Gosh I am honest).  One is their double-taxation of higher rate pension contributions, which are called ‘fundamentally misguided’ here. But I am slightly more worried about their capital gains tax proposal.  Yes, I know Nigel Lawson did it first.  But a 50% rate for entrepreneurs is surely very damaging.  Does Luke Johnson go over the top in today’s column:

their Treasury spokesman Vince Cable, who claims to be an expert in finance and business, (although he has never actually dealt with a payroll in his life) expects entrepreneurs to take all the risk, and the government to take half the reward. At a stroke they would kill initiative, and send a massive signal to wealth-creators: do not invest here.

I take some small comfort from the fact that the Federation for Small Businesses does not mention it in today’s press release – nor in their manifesto.  But it would put me off being a risk-taker.

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11 thoughts on “#bigotgate distracts from important message: IFS very +ve for LibDems

  1. “expects entrepreneurs to take all the risk, and the government to take half the reward. At a stroke they would kill initiative, and send a massive signal to wealth-creators: do not invest here.”

    A small message from the front line. I’m in the process of considering a small factory. Looks like a good idea, we’ve got the right process, can get both all our supplies and a decent workforce in a town part of the rubble of the old English industrial north. Finance is available, we’d even be helping the green revolution (we’d be making a vital part for a certain type of fuel cell), be world leaders in our tiny marketplace.

    All great stuff really. At 18% of what I might make if successful sure, I’d come back to the UK to run it. At 50%, not a chance in hell. Just no way. I *can* run it with fleeting visits and keep out of the CGT net. And at 50% I most certainly would.

    There really is a Laffer Curve you know.

    1. You could always take the gains and reinvest them within two years for rollover relief. I suspect there would be a small initial bump in investment for this reason if the policy was introduced. Although the reckoning has to come sometime, I agree.

    1. Though of course we need to find it every year.

      But I am (strangely?) less worried about the Elephant now than I was

  2. But why should “entrepreneurs” (not everyone earning stacks of cash is an “entrepreneur”) pay a lower rate on their capital gains than the lowest income tax rate?

    1. Too big a question to answer neatly but (A) they are taking a risk that is far greater than a salary. iIf you invest £1m in the long shot hope of making £9m and expect to lose 70% of the time, say, then taking 50% of the profit when it goes well would put off many an entrepreneur. There is a good utilitarian point to make – you prevent good businesses being set up that would benefit everyone.

      Capital gains are much more difficult to achieve than income in many ways – except when you have some filthy tax accountant making them for you

      1. That doesn’t make any sense, because it doesn’t matter how many entrepreneurs you have if you’ve got no labour.

      2. We’ve got no labour? Someone must be told, quick. All those people on the unemployment queue are conning us!

  3. Actually, I think that higher rate tax relief on pension contributions is not tenable unless the maximum annual contribution eligable for relief is powerfully reduced from the current £255,000(!). (For comparison, eligable contributions for tax relief to personal pensions in Sweden are about £1000 per year.) Even the National Association of Pension Funds thinks that it is unreasonably generous.

    “Tax relief on pension contributions of £37bn is heavily skewed towards the better off. Treasury figures show that 60% of tax relief goes to higher rate taxpayers, with 25% – nearly £10bn a year – going to the top 1% of earners.” (Source.)

    Remember that pensions are tax-efficient because the state wants to encourage people to save for their retirement. The real pension problem in Britain is that low and middle income earners (the real middle, not the “middle income earners” that the Sunday Times thinks are higher rate taxpayers!) do not save enough for retirement. Higher rate tax relief is irrelevant to them. The top tenth of the income distribution should have more than enough money to save some; if they don’t it’s their own fault, frankly. And remember, the ISA contribution limit is now £10,200 per year, which should be more than enough tax-efficient savings for most higher-rate taxpayers in addition to their occupational pension.

    Either you pay out a flat rate 20% relief (incidentally simplifying tax returns a bit) as the Lib Dems propose or you cut the ceiling for tax relief-eligable contributions. The current system is a waste of public money.

    I have a lot of sympathy for the case for the entrepreneurs’ tax relief, but I have not seen any Lib Dem plan to abolish it. I thought all we were doing with CGT was cutting the annual tax-free allowance and raising the rate to equal income tax? By the way, the “fundamentally misguided” link does not appear to contain that phrase or anything to do with pension tax relief (unless the Acrobat search function is malfunctioning). Could you give me the page number?

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