UK Tax: Cameron addresses a taxing conundrum

29 May 2010 - Since David Cameron entered Downing Street, the consistent message from No 10 has been about the urgency of reducing the public spending deficit.

Yesterday, in his first major speech on the economy, the Prime Minister had a different message. He said his administration's top priority was to "re-open Britain for business". This speech, delivered in the former Yorkshire mill town of Shipley, was aimed at persuading business that the two objectives are one and the same.

"Our plans to revive our economy are not simply about cutting public spending and hoping the private sector will spring into action. Government cannot be a bystander," he said, adding an important caveat to Conservative ideology about reducing the power of the state.

It is difficult to disagree with any of his three central points: that business needs to be freed from restrictive red tape; that governments have a vital role in fertilising the growth of enterprise; and that the British economy needs to be rebalanced, spreading prosperity more evenly both between south and north and between the service sector and manufacturing. Underpinning all three was the notion that future economic growth and Britain's place in the world depend on shrinking the public sector and growing the private one.

Because this speech was more about principles than specific initiatives, the Prime Minister was not obliged to confront the innate contradictions of the Conservative-Liberal coalition. For instance, he criticised the previous government for heaping "too much tax" on business. Yet this is the administration that appears to be about to hike capital gains tax (CGT) from 18% to 40% or 50%. It is all very well for Cameron (and Vince Cable) to maintain that this is not intended to damage enterprise and investment. Where does that leave an entrepreneur who has invested in property to raise risk capital, as many did during Labour's years of excessively generous CGT allowances?

Yet despite the Tories' low tax instincts, Cameron must stand firm. Otherwise the rich will continue to turn income into capital to escape the tax net. Besides, it is necessary, to pay for raising the income tax threshold and take the low paid out of tax.

Central to supporting small- and medium-sized business is the importance of getting banks lending again, especially those largely owned by taxpayers. But here, too, the devil is in the detail. It is easy for the Prime Minister to lambast their "zombyish" behaviour but banks have simply gone from taking too many risks to taking too few. Who is going to decide whether a business has been refused credit unjustifiably, especially when Labour's appeal scheme has been scrapped? Besides, if the pendulum swings too far back towards risk, what happens to the public stake? This government may find this conundrum as tricky as the previous one did.

On rebalancing the economy, Cameron speaks a lot of sense. Though manufacturing has shrunk to just 17% of GDP after decades of decay under both Tory and Labour governments, what is left deserves to be cherished. And the north-south divide needs to be addressed, which is why the new government has so quickly toned down its rhetoric about dismantling regional development agencies.

On the public versus private debate, Cameron risks imparting a simplistic "private good, public bad" message. The public sector has saved Britain from a deeper recession and higher unemployment. It should be trimmed with care because public servants are consumers and taxpayers too. Besides, do those calling for 100% spending cuts and 0% higher taxes really want fewer nurses, teachers and fire officers?