View from the house - Don't hold your breath for income tax at 20%

In my last article, I took what I thought was a realistic look at the principal tax promise of the Labour party, namely to reduce the ‘starting’ rate of income tax to 10%. I concluded that it would take about 60 years to achieve. Fairness alone dictates that I try to take a similarly dispassionate view of the main Conservative tax pledges.

The Tory tax promises that are most important in planning terms are to combine the starting and basic rates of income tax on 20%, to get rid of capital gains tax, and to abolish inheritance tax. Surprisingly, it is the first of these that may prove the most difficult to achieve. You would think that a Government that has brought the basic rate of income tax down from 33% to 24% in less than 20 years, albeit with some increases in indirect taxes along the way, would be able to manage the remaining 4% without too much difficulty, but I fear that this may not be so straightforward.

In the past, Conservative chancellors have been able to use the relatively low levels of indirect taxes such as VAT, together with the tendency of the Government’s revenue to fall into line with its spending in the course of an economic cycle, to force the headline rate of income tax downwards and rely on a combination of good luck and good judgement to take up the budgetary slack – but those days are gone.

Indirect taxes are no longer low, they are a substantial part of every family’s budget, and there’s little scope for increasing them: that is why Labour’s proposed windfall taxes on utilities, which will inevitably force their way into prices, would be so socially damaging.

Likewise, the overwhelming weight of Government spending programmes is now such that nobody outside the Cabinet can seriously expect the Budget to get back into surplus before the next world recession forces up welfare spending again, and the scope for the Treasury to fudge the figures is therefore smaller than ever before.

It is for these reasons that I would expect the present Government’s progress towards its 20% target to be very slow and probably, this year, non-existent. Any cuts in Government spending that can be achieved will be needed to reduce the Budget deficit rather than to fund income tax cuts that would inevitably need to be reversed after the General Election by the Chancellor’s successor.

Nevertheless, all is not quite so bleak. Assuming that the Government continues steadily to reduce its own spending commitments after the General Election, I would anticipate that the basic rate of income tax could well have been reduced to 21.5% or 22% by the time the next recession hits our economy, and that same expenditure control might well enable the next Chancellor-but-three to complete the process of consolidating income tax rates at 20% by 2006 or 2007.

In my next article I will look at the Government’s tax pledges to abolish the two taxes on capital. As a teaser, I intend to show how the Government could abolish both CGT and Inheritance Tax in the first Budget after the General Election – and increase Revenue to the Treasury in doing so.

Michael Stern is Conservative MP for Bristol North-West.