TaxPersonal TaxBudget 2001: Debunking election pledges

Budget 2001: Debunking election pledges

The imminent general election will be all about the economy, and that means it will be about tax and public spending.

Of course we are interested in other ingredients of the economic picture; overseas developments and America versus Europe, interest rates and what the Bank of England is up to, the behaviour of the markets, industrial productivity, and of course the euro, to name some of them. But these aren’t things easily or unambiguously quantifiable.

What can be quantified – we think – are the figures for the public finances – the tax take, the spending, and the balance.

The problem is that not many people understand the numbers in totality.

We’re spoon fed on items of a magnitude which people think we can get our minds around. £100m for health, for instance, or £300m to encourage the volunteer services.

Maybe the politicians are right in thinking we can’t get our minds around the totals. But we ought to try. For trying to understand the state of the public finances by reference to this sort of size of figure is like trying to understand the state of household finances by how much is in the children’s money box.

Set out below is a table for where the money comes from and where it goes to in 2000-2001. The numbers are taken from November’s pre-Budget Report.

For later years of course the figures are dynamised, according to plans and expectations of economic growth. For 2001-2002 receipts are put at £399bn, and expenditure at £395bn. For later years no receipts figure is given but expenditure projections go to £418bn for 2002-2003 and £442bn for 2003-2004 (note, the return to the old habit of planning spending before income).

There are interesting things to note about these numbers. First, of course, their sheer size. Around £400bn is taken in one way or another and another £400bn is spent. The so called ‘war chest’ is represented by the excess of taking over spending. But this amounts for the years 2000-2001 to only £8bn. And yet these are the nets of a wash through of £800bn, so it only takes an adverse swing of 1% on either side to sweep £8bn right away.

And the numbers are necessarily uncertain; heavily dependent on forecasting which reflects past experience but doesn’t insulate you against shocks, for instance lower growth in the wake of an American slow down. And the dynamised future figures show what there is to play for.

The second interesting feature to note is the relative size of the different elements of income and outgoings shown in detail for 2000/01, but over the period we are talking about proportionately pretty steady. Here are some striking things. On the income side there’s the relatively small contribution which council tax and corporation tax makes to the total of government receipts. There’s the size of national insurance – the second largest single money spinner; no wonder governments are nervous of merging income tax and national insurance when illusion still rules and a rose by any name other than income tax smells sweeter.

Hidden away in ‘other’ is something of the order of £22bn on fuel duties.

The fuel protesters last autumn were right to say that a relatively large proportionate cut here would make very little difference to overall public finances. Turning to the spending we see the huge amount taken by social security, the area the government was supposed to tackle but shied away from.

The opposition tells us it will match the government’s spending plans for the NHS, education, transport, defence and law and order, but at £150bn these amount to not much more than a third of public expenditure leaving a lot of room for relative readjustment and let’s remember that in our dynamic situation of growth, whatever debate one has about the rate of growth, relative adjustments in size can be made relatively painlessly.

We must not overlook the cheating and the hiding. ‘Other’ spending has £2bn stashed away in the reserve. We can leave aside for a moment resource accounting, which is not so much a cheat as a confusion at any rate at the totalled level, however useful at the micro level for the individual activity or agency.

Then there’s the private finance initiative and other devices which keep money off today’s spend in return for never-never payments in the future.

Then there’s guaranteeing of sidelines such as the channel tunnel rail link, off the books but risky.

By a separate order of things there’s hypothecation, where amounts are netted out between take and spend – without any bookkeeping difference to the net, but with effects on the separate totals, themselves of political and economic significance.

So where does this take us? First, to take the figures with a grain of salt. True, as all accountants and other sensible people know, there’s no such thing as a ‘right’ answer when you are dealing with accounts.

But there can be a consistent answer, which is what private accounting standards among other things aim for, and it’s not clear we get that with the overall public accounts. After all they’re not audited or designed to any particular standard.

But this, in the short electoral and budget term, is less important than the need to hang on to the concept of materiality. This is where politicians really make hay. As we see from the figures, there’s no point in getting overly excited about sums in the order of £8bn, or even £16bn, whether seen as public expenditure saved or taxes cut or both. This is all within the orders of materiality and possible error, especially as the years covered ahead are not specified.

At the retail end we may get excited if a share of this £8bn comes our way personally or locally. But in terms of judging the state of the public finances, current and prospective, the figure is not a material one. And even if we are to judge it at the retail end, we’d like to know more about it and what it comprises. For instance there’s the claim to make £1bn ‘efficiency savings’ in the public services.

Of course something’s always available in any large organisation, but it is not measurable and also very much less than it might have been after 20 or 30 years of really hard work in seeking out and cutting down the dead wood and fraud. If ministers choose to waste money – for instance on the Dome – that’s another matter.

And the final point to recognise is the difference between the past, present and future. There is no more misleading word in the public expenditure vocabulary than ‘cuts’. True from time to time one does get genuine cuts, where less cash money is actually spent in a specific area. But overwhelmingly ‘cuts’ just means less of more.

The famous £16bn we keep hearing about does not involve cuts in the way most people would understand; it simply means that on plans, the opposition would increase public spending over the period by this much less than Labour would, or something in the order of £55bn instead of £70bn per annum. Still a substantial increase. And with tax changes, as may be.

What we are talking about here is not cuts but choice; we’re into a political and social policy. Politicians love numbers because they beat thinking.

But people should be aware of their limitations.

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