Philip Hammond’s upbeat ‘tiggerish’ message last Tuesday brought in a new breath of fresh air, that we are over the worst: and so we are. However like Odysseus steering his way through the sirens and the shoals, the next few years will continue to require careful economic management.
I attended the Institute for Fiscal Studies seminar last Wednesday morning, and they spelt out some of the heffalumps requiring traps which were left silent in the Spring statement.
- Concentration of taxpayers: did you know that 28% of Government revenues are generated from just 1% of the population? Or that only 56% of the population actually pay any tax at all, compared with 2/3 a decade ago. Wealthy people migrate if they don’t like the treatment meted out to them, so this level of tax reliance means we need to beware those wealthy EU nationals going home, not to speak of those Russian oligarchs.
- There’s been a 40% growth in self-employment over recent years, at a cost of £10 billion to the Exchequer due to their different tax regime, and it’s rising. The government has to account for this change in working patterns although it must, in our view, maintain the recognition that greater risk taken deserves greater reward in terms of after-tax returns.
- Interest rates: for every additional 1% on interest rates, the cost of paying interest on national debt - which is now 50% higher than a decade ago - is £5 billion. So Philip Hammond needs inflation to settle back down (a return to 2007 interest rates would add an extra £20 billion to the annual deficit).
- Fuel duties: the Government collects c. £30 billion each year from duties on petrol and diesel, including both VAT and the specific fuel duty: that's a total of c. 65% of the costs of fuel at the pumps. But electric cars are rapidly entering the market now, and only incur 5% VAT on every 1 pound spent - so that’s a loss to Government revenues of 58p per litre forgone. The Office for Budget Responsibility (OBR) predicts a reduction of 20% in Government fuel tax duties by 2020/21: that’s £6 billion a year, and the shortfall will only get larger.
So in Exchequer terms there are major question marks hanging over a significant part of future Government revenues, quite apart from the impact of Brexit.
However it’s benefit cuts on working families which are planned to bear the brunt of deficit reductions over the next few years, and this is the fifth (political) elephant in the room. The IFS chart shows the impact of benefit cuts yet to be applied, as universal credit is rolled out: as a percentage of household income in decile segments of the population. However the IFS made clear that these will not affect older, retired people: it will be working age families who feel the burden most, and they said that households with children will be particularly affected.
This is all the more reason why we now need a major initiative to bring hope and opportunity to young people in families in receipt of Child Tax Credit, the poorest 17% of the population.
Based on its Stepladder of Achievement for young people in care, The Share Foundation has put forward a proposal for an incentivised learning programme for all such children: there’s c.140,000 in each year group. With life skills including learning steps of literacy, numeracy and financial education, each young person would have the opportunity to earn up to £10,000 from the age of 15, which would be credited to their Child Trust Fund or Junior ISA; and, as the programme is taken up across the United Kingdom, lost Child Trust Funds - disproportionately affecting children from the poorest families - will be located and restored to their rightful owners.
A series of meetings with MPs three years ago emphasised the importance of benefits for young people being earned, and that straight handouts are ineffective. We agree, it builds a responsible approach to wealth creation for the future, in the same way as micro-finance.
Such an incentivised learning programme could be financed by voluntary payments for universal services used by higher rate taxpayers: it could be cost neutral to HM Treasury.
However action is needed to offset the political impact of substantial cuts in benefits for working families and, when put in the context of the other four heffalumps (five, including Brexit), we can do without additional political risk threatening Government stability at this time.