TAX NEWS - JUNE 2010

UK Tax: Burden of Pain

The Geddes axe is being sharpened. In 1921, David Lloyd George, the Prime Minister, appointed the first ever Transport Minister, Sir Eric Geddes, to be the chair of his committee on national expenditure. Lloyd George had two aims — to make the case for reducing spending and to make sure that Geddes had his name on it.

The reports that Lord Browne of Madingley is being sounded out as a latter-day Geddes suggest that David Cameron and Nick Clegg would like to erase their fingerprints from the axe too. The contrasting interviews they gave to Sunday newspapers suggest different emphases or, perhaps, a choreographed good-cop, bad-cop routine. Mr Cameron makes specific suggestions for savings from welfare-to-work or from restricting child tax credits to families on less than £26,000 a year. Mr Clegg promises that there will be no repeat of the slash and burn he alleges happened under Margaret Thatcher.

Mr Cameron would, of course, never make derogatory mention of his predecessor but, that partisan reference aside, his interests are identical with Mr Clegg's. Karl Kraus once said that an aphorism is never the whole truth. It is either a half-truth or a truth and a half. Mr Cameron is telling one half of the truth and Mr Clegg the other. The prize for both is to cut severely but with a fair distribution of pain. If they can return the nation to financial surplus without cultivating a reputation for callous disregard of the victims of austerity, there could be a big political dividend on offer.

That is not to say that the central argument for reducing the deficit is without just cause. Money spent on servicing the debt is money forgone for education, health and policing. Avoiding action will have detrimental consequences for interest rates and, hence, for mortgage payers. But this, as Mr Cameron has pointed out, is going to hurt. The £6 billion of cuts announced so far were relatively easy but even that small reduction in cost did not really come, as George Osborne had said it would, solely from "efficiency savings". There is a case for and against the Child Trust Fund, for example, but it is, or rather was, a real programme, with real recipients who will notice that it has gone.

This is going to get tougher still. If health and defence spending are left out, there will be reductions of around a quarter in some departments. Without countervailing action the burden of these cuts is likely to fall on the least well-off, who tend to be the recipients of affected programmes. Searching for comfort, Mr Clegg has pointed out that the Liberals in Canada, the Social Democrats in Sweden and Bill Clinton in America all managed to repair the finances. However, in all these countries, spending cuts and tax rises each did roughly half the work. The coalition has a stated aim that the bulk of the deficit reduction — 80 per cent — will come from spending cuts.

Quite apart from their intrinsic undesirability, tax rises will cause a political tempest. Faced with opposition from his own party, Mr Cameron may have to water down his proposals for rises in capital gains tax that were designed to pay for lifting the threshold at which the payment of income tax begins. The decision of Mr Osborne as Chancellor not to reverse a tax rise on pension contributions that he inherited from Labour has brought protests from the business lobby that extra levies on entrepreneurs lose tomorrow a lot more than they gain today.

UK Government has only blunt instruments at its disposal — tax and cuts — but even blunt instruments can do a lot of damage. By inviting the Liberal Democrats into government, Mr Cameron was seeking to cement the modernisation of the Conservative Party. By accepting, Mr Clegg was risking his credentials as a progressive liberal. Yet both might be rewarded if they can demonstrate something that the nation too needs to see — that constantly growing government is not the only road to the good society.