‘Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude’
Alexis de Tocqueville, author of ‘Democracy in America’ 1835
The UK Chancellor of the Exchequer will be working hard to find the right balance for her first Budget on 30th October. She wants to prioritise growth, which is eminently sensible to get the UK economy moving, but also has to resolve what she politically describes as the black hole left by the Conservatives. In fact, our chronically excessive national debt has more to do with seventy years of socialist welfare, combined with the Conservatives’ reluctance to remove these free services from their wealthy old voters (although excessive furlough pay-outs during the pandemic certainly didn’t help).
The Ipsos chart in The Sunday Times asking, ‘What are the biggest problems for you personally (and, separately, for Britain)?’ also concentrates attention on the economy. Two-thirds of respondents cited inflation and prices, NHS and healthcare, and the economy as the big issues for them personally: immigration was only 4% and housing, 9%. The fact is that long-term provision of free universal welfare is the issue which has crippled the economy, and tax rises will at best provide short-term sticking plaster to address this.
In any case, Rachel Reeves has already made a commitment not to raise the main rates of income tax, National Insurance, VAT and corporation tax: hence all the media debate has been about capital gains tax, which she didn't mention. But is it really sensible to drive entrepreneurs and others who are prepared to take risks investing in business, away from the United Kingdom if she wants to prioritise growth?
I recall a meeting with Treasury officials several years ago when the significance of mobility of tax paying became apparent. The meeting was before the substantial hike in stamp duty on high-value property, and one of the attendees drew a clear contrast between taxing those things that can move — such as people and businesses — and those things that are stuck to the ground, like property. So, I wasn't surprised to see the massive increase in stamp duty rates on housing when it came through.
Property is also wholly different to business investment when considering risk. Of course, if property ownership is heavily leveraged with mortgage debt there's a risk of ‘negative equity’ — but that’s hugely different to the risk of business failures or falling market capitalisations when you take investment risk.
It's that contrast which was recognised when the clear distinction was struck between capital gains tax on property and investments: the former is taxed at a top rate of 28%, and the latter at 20%. So, risk is important, and the argument for ‘bringing CGT into line with income tax’ is simply inappropriate, because it seeks to ignore the real burden of risk-taking.
I do have some sympathy with removing the anomaly on the treatment of carried interest for private equity, but otherwise the Chancellor would be well-advised to leave capital gains tax on business investment untouched.
Capital gains tax on property, however, is a very different matter. If an increase for this is on the cards, it would be sensible to revisit inflation indexation on purchase costs: but that Treasury official’s comments about taxing things fixed to the ground remains as relevant today as when it was first spoken.
So, there may be some scope for modest additional returns on taxation without endangering those growth ambitions. However, the main challenge is to reduce the heavy burden of the welfare state. We have made some clear proposals for this by advocating mandatory private health insurance for wealthy old folk, accessible for draw-down by the NHS when they use it.
A City colleague of mine has tested reaction to this proposal from a number of his wealthy clients, who have been almost universally positive in their response. They can see the generational fairness of paying for their own healthcare in their old age and not burdening young people — who are less likely to use health services anyway — with the cost.
I've not heard any response from Rachel Reeves to this proposal, but I understand that very few responses are sent by ministers these days in any case: one just has to hope that senior civil servants will pass on the ideas.
There is no doubt, however, that the Chancellor will have to take significant decisions to tackle the enormity of national debt. It's already passed 100% of GDP in the United Kingdom, although we're still some way off the scale of debt in the United States, where 76% of income tax revenues was spent on U.S. debt interest in June. For comparison, our figure is just 36%; but that may simply reflect the fact that far too many people are in the higher income tax brackets in the United Kingdom, after the long-term freeze on income tax thresholds imposed by the Conservatives.
Western democracies must get to grips with excessively large public expenditure caused by social democracy, which has resulted in such massive inter-generational unfairness. The answer lies in introducing a more egalitarian form of capitalism, which we have advocated in these commentaries for several years. Perhaps Rachel Reeves might decide to take a leaf out of our books?
Gavin Oldham OBE
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