John McDonnell
PAYING FOR TAX CUTS
All my adult life I have lived with Labour lies about tax cuts. Their cry is always the same. Tax cuts are impossible in a civilised society. They mean less revenue for the state, which means sacked teachers, unemployed doctors, fewer nurses. I am amazed anyone still takes such arrant twaddle seriously.
Cuts in tax rates on individual and company income nearly always produces more revenue, not less. Just across the Irish Sea they slashed Corporation Tax to 12.5%, and cut income tax. As a result their revenues have grown much faster than ours, allowing them to increase their spending on public services twice as quickly as ours for more than a decade. The last Conservative government cut top rates of tax and found it was an excellent way of taxing the rich much more. More rich people came here or stayed here. More invested and created jobs here. As a result they paid more tax.
No sensible elected politician would look for spending reductions out of sacking teachers and nurses. We all know how important they are, and know that our electors want to keep what we have and employ more where possible. For seventeen years of Conservative government we heard from Labour that we were cutting health and education, yet every year those budgets went up by considerably more than prices. Health expenditure almost doubled in real terms. The tax cuts helped pay for this.
There are five ways of paying for tax cuts. A government could as Labour say cut teachers and nurses. It could borrow more. It could increase other taxes. It can cut wasteful and unnecessary expenditure. It can use the proceeds of growth.
We can rule out the first. No-one in the UK is proposing that. I would also rule out borrowing more, as we are borrowing too much already. This was the route Mr Brown chose for his cuts in Corporation Tax and Income Tax announced in his last budget, allied to putting up some other taxes.
The absurdity of Labour spin is underlined by Mr Brown’s last budget, heralded as a tax cutting one. He rightly recognised that the UK’s income and corporation tax rates are no longer competitive, and need lowering. When he does it, it apparently can be financed without sacking nurses and teachers!
The best way to pay for the tax cuts is from the proceeds of growth. This is not magic money, nor some politician’s sleight of hand because he wishes to avoid Labour’s so called “hard choices”. Every time the economy grows by 1% the Treasury gets £5,000 million a year extra revenue from all the additional business, transactions and jobs the 1% growth creates.
The economy, on average, grows at 2.5% a year. So after three years of average growth the Treasury has a mind boggling £40,000 million extra each year in new revenue. There is no need for the government to spend all of this on public services. Some can be given back to the taxpayers – it will help generate even more revenue as the effects of lower taxes work through.
The Conservative’s economic policy review recommended £2.6 billion of tax reductions from abolishing Inheritance Tax and lowering and reforming Capital Gains Tax, £4.8billion from 3p more off Corporation Tax, and £3 billion off Stamp Duty on shares. It also recommended raising the 40p income tax threshold, and starting to cut Stamp duty on homes. All of this would be eminently affordable from the proceeds of growth over a Parliament, with the tax reductions phased in as state revenues and expenditures allowed. Labour costed it at £21 billion as they forgot that some of the cuts have already been put through by their own government, drawing on the excellent work of the Forsyth Report.
This is all without cutting out the waste of the Quango state, ID Cards, regional government, bloated PR budgets, endless management consultancy contracts, expensive reorganisations in health, fire and other services, and the large losses through wrong benefit payments.
I agree with David Cameron that economic stability comes first. The point to take on board is how much scope using the proceeds of growth would allow. The top three tax reductions would be easily affordable in the first three years, assuming normal growth. If at the same time the state got to grips with the waste and unnecessary spending in so many areas, there would be more to cut borrowing, spend on priority areas and pay for tax cuts.
There is no magic money. Tax cuts work because people work harder and earn more if there is more incentive. The best way to get more tax from the rich is to cut rates. The best way to deliver more jobs for the less well off is to cut tax.
