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Christmas may end with a rather unpleasant epiphany for business this year. Not only because it has been a season of strikes and disruptions, but also because the government’s inability to spend more from the state budget is becoming abundantly clear. Business leaders need to start talking about the fact that big tax increases, beyond those already in the pipeline, are very likely.
The brutal truth is that public services have grown. Take the NHS; Ambulance service has been disrupted. This winter, the number of patients treated within four hours in large emergency departments (so-called “type I” departments) is already below 70 per cent across England — and the cold has not yet caught up to the figure. The target level is 95 percent.
A return to the old standards would cost a fortune, especially as the NHS now has very few managers. But even maintaining this current terrible level of service will cost a lot. Demand for healthcare will continue to grow. Existing public estates will need to be extended and refurbished – the Department for Education noted this week that the school building is at risk of collapse. And public sector salaries will have to rise relative to private salaries to retain employees.
It is impossible to avoid these costs. For all the “Is it time to rethink the NHS?” Think-pieces Since then, every attempt to change state borders has been politically painful: think university funding and benefits reform. And how do you rewire the state to avoid paying for new schools and hospitals one way or another?
The Ghost of Christmas is yet to come. If interest rates fall sharply, that can free up cash that would otherwise go into servicing debt. Growth may return. But, equally, we can go out of our way to fix services and face huge bills of tens of billions a year. Very large medium-term tax increases, outside of planned increases, are entirely possible.
The forces driving this surge are beyond the ability of business lobby groups to resist them. Given that, they need to start talking more about how they should raise taxes.
The prospect of higher taxes should focus on life after the so-called “super-deduction,” a pandemic allowance that provides tax relief on 130 percent of the cost of qualified investments. The scheme will be completed in April next year. That’s important because an increase in tax rates will make tax breaks more important and powerful.
Furthermore, the CBI, a business lobby group, is right on the big picture: the solution to the rising tax burden is a bigger economy. And Britain’s long-standing growth problems, particularly since the Brexit referendum, have been linked to the country’s lack of business investment. And what are the key levers we use to target business investment? Tax concessions.
The CBI, together with Britain Remade, is pushing for a new pro-growth campaign, so-called “full spending”, which aims to improve the tax treatment of investment.
To recap this fallacious old point: Right now, buying a ream of paper is considered more tax-friendly than buying a printer. The cost of paper can be written immediately while the investment in the printer is only recovered. Year Full Cost will allow businesses to claim for printers on the same terms as paper.
Here is the danger. A rapid relief system would create opportunities for Britain’s world-leading spiv sectors to detect innovative new fraud and fraud; Keep your eye out for deals on second hand printers!
The Treasury has also warned that absolute spending “risks promoting inefficient, low-return debt-financed investments”. But super-deductions didn’t do that. To be honest, overinvestment is a nice problem right now.
It certainly won’t fix everything on its own: the planning system is a conspiracy against prosperity. Compromise with the EU is useless. The skill training system is topsy-turvy. But as part of the growth drive and to deter investment from increasing taxation, it seems appropriate. What we are doing now is clearly not working.
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