Tax reform 'must respond to globalisation'

George Osborne has called for "a fundamental rethink to prepare our tax system for the 21st century".

In a speech to the Policy Exchange think-tank on Friday, the shadow chancellor said that the fiscal system must respond to increased globalisation in the economy if Britain is not to fall behind international competitors.

"The tax systems of all developed economies face profound challenges over the next few decades, with serious consequences for what and how we tax," he claimed.

"We face mobile flows of capital and labour, when the building blocks of our tax systems were largely designed for a much more closed economy in which only tradable goods crossed borders."

'Rethink'

However he added that: "We need a fundamental rethink to prepare our tax system for the 21st century.

"But there is no evidence that the present government understands these long-term challenges to our tax system, let alone has any plan to address them.

"Instead, Budgets and pre-Budgets are driven by the shortest of short-term political considerations, with little apparent regard for the longer-term economic consequences."

Osborne also proposed setting up an Office of Tax Simplification.

Review

And he appointed former chancellor Lord [Geoffrey] Howe to lead a review of tax policy for the Tories.

"I look forward to receiving the conclusion of Geoffrey's group so that we can embed Adam Smith's principle of certainty in a new way of making tax law," the shadow chancellor said.

The speech came in the wake of a campaign, largely generated by Tory-supporting blogs, for a firmer commitment to tax cuts in the wake of Osborne's well-received pledge to cut inheritance tax last year.

Right-wingers also want the move to be paid for by a pledge to spend less than Labour.

However Osborne and Conservative leader David Cameron have so far resisted the pressure.

They have pledged to match government spending plans to 2011 and cut tax by "sharing the proceeds" of economic growth between spending on public services, reducing national debt and lowering the tax burden.

Reputation

Following a difficult week for the chancellor, Osborne also launched a fresh assault on Alistair Darling's reputation.

He said that U-turns on non-domiciled and capital gains tax changes, as well as the Northern Rock crisis, have hit the UK's, as well as the government's, credibility.

"I suspect the chancellor of the Exchequer will never recover a reputation for competence," he argued.

"But what concerns me is the damage done to Britain's long-held reputation as a stable and predictable place to do business.

"If the damage to our reputation is not to be lasting, we urgently need a new approach."