Christian Spence, Head of Business Intelligence, talks tax, spend and devolution.Not only is today my birthday but, according to the Adam Smith Institute, it is Tax Freedom Day, the first day of the year for people in the UK when they get to keep the money they earn instead of passing it to the government. For the first 148 days of 2014, the total income earned by the population is equivalent to the annual tax take by HM Treasury; from today onwards, it's yours!
The date moves around each year but has fallen around the end of the May or early June for much of the recent past, with 1981 seeing the latest date (20 June) and the earliest in 1993 on 20 May. This year it falls three days earlier than last year when it fell on 31 May, so maybe things are getting better for us.
The current government is grappling with a large fiscal deficit (down around a third since 2010 but still over £100bn per year) and aims to eradicate it entirely by 2018/19. Most of this reduction is predicated on a strongly growing economy with public spending moving, on the whole, very little (less than 1% per year over this parliament but forecast to be quicker in the next) though some government departments have seen much higher cuts with others being protected (local government has seen cuts of over a third since 2010 whilst health and education have been largely protected; international aid has seen a large increase but, in the scheme of things, is a relatively small spend).
The Chancellor has openly stated that he sees Britain's future as a low-tax economy. Headline corporation tax rates are on a downward path to 20% over the coming years and the personal allowance (the amount an individual can earn before paying income tax) has risen strongly, reaching £10,000 per year last month with parties competing over who can raise it further in the next parliament. However, we are seeing a change in the balance between input and output taxes. Companies who make a profit are now subject to lower taxes on that profit than at any time in the UK's tax history but input taxes (those levied before profit) are increasing.
There has been a focus on business rates over the past few years with companies increasingly regarding them as an unfair system which levies significant costs on doing business before any income has been generated. Couple this with increasing employers' national insurance contributions, auto-enrolment into mandated pension schemes and other government policy-driven levies such as those green taxes on energy and businesses are paying a greater share of their turnover in taxes though the share of profits that goes to Treasury continues to fall. Many businesses tell us that they feel this balance is now unfair and see a determination to lower the headline rate of corporation tax at the expense of other input or hidden taxes as a barrier to growth. The headline rate has an important part to play in signalling international competitiveness but it is already only a fraction of the rates in most of our key competitors and, because for many businesses the amount of profit declared is a easily-manipulated number, is only one small consideration in choosing where to domicile an international company.
Over and above all this, there is a natural tension evolving between government tax and spend. With the current government openly wanting a lower share of GDP to be collected in taxes but an ageing population requiring more money spent on health and social care, the balancing of the country's books is increasingly dependent on a strongly growing economy maintaing its course if these two things are ever going to be achieved. Efficiency in delivering services is going to become ever more important if the cost to government of delivering services for less is going to be achieved. Empowering local government and spatial partnerships to deliver more services closest to their clients could make a huge difference but the way tax is raised will have to change too. If we're going to successfully tax less and deliver more, we'll have to ease out Whitehall and increase the powers of the Town Hall. There are positive noises from the main political parties in this area, but they don't go far enough.
Dr John Ashcroft, Chief Economist at Greater Manchester Chamber of Commerce