Tax cuts seem to be on everyone’s wish list. One MP highlights where tax cuts could be made and the benefits to the economy those cuts could achieve. That is if the government admits where its forecasts have been going wrong and tries a new way of growth-based thinking
Sir John Redwood is fed up. The Conservative MP for Wokingham and former Secretary of State for Wales is feeling a sense of dread and frustration over how the UK’s economic and tax policies are being decided. He is not alone. The feeling is mutually felt by the 4.5 million self-employed, freelance and contractor workers in Great Britain.
“We are fed up with being controlled by wrong forecasts by the OBR [Office for Budget Responsibility],” he says. Adding, “Nor should we have to pay further for the wild policy swings of the Bank of England who did much to give us inflation in the first place,” says the MP.
“Just do something to cheer us up!” he urges fiscal policymakers and Chancellor of the Exchequer Jeremy Hunt in a recent article on Conservativehome.com.
Today, the Bank of England announced it would keep interest rates at 5.25%, so perhaps the committee is owning up that higher rates have not helped the economy as expected and any more might just break it.
He argues that the UK government should cut taxes, even though the Treasury has warned that this would cause inflation. Redwood argues that the Treasury’s forecasts have been wrong in the past and that the government’s recent spending increases and tax rises have actually contributed to inflation.
“The Treasury briefing keeps telling us unfunded tax cuts will cause inflation. Yet we have just lived through two years of surging and high inflation with increased taxes; that should lead them to question their bizarre view.”
He finds the OBR’s acknowledgement of overstating this year’s borrowing so far by £20bn a red flag since they have no scope to cut taxes.
In all, Redwood’s point of view is that the government should focus on boosting economic growth and reducing public spending, rather than raising taxes. He argues that tax cuts will stimulate economic activity and lead to higher tax revenues in the long run. Redwood also argues that the government should be more frugal with its spending and that it should focus on areas where it can add real value.
Redwood’s case for tax cuts
Redwood’s budget proposals probably seem sensible to most of the UK’s self-employed. He proposes a number of specific tax cuts, including suspending VAT on domestic energy for heating and taking 5% off petrol and diesel via a temporary cut in fuel duty. He also proposes raising the VAT threshold for registering small businesses and changing the rules for self-employed people. Redwood believes that these tax cuts would boost economic growth and help to bring down inflation.
“The VAT threshold for registering small businesses should be raised to £250,000 from £85,000,” he proposes. “This would release a lot of new capacity quickly which in turn would produce a bit of downward pressure on prices. More importantly, it would generate additional tax on incomes and profits as the small businesses did more,” says Redwood.
He is also calling out the government’s lack of foresight on borrowing. He sees the government’s policy of boosting spending by £350bn a year over three years rather than for a longer period as careless and costly. He also cites the recruitment of 103,000 more civil servants over six years as a contributing factor to the UK’s high inflation.
He also raises the point that the Conservative government has been using rising oil prices and the war in Ukraine as a weak argument for the nation’s economic woes. In his estimations, the UJ’s inflation was already three times the target before the Ukraine-Russian conflict began.
IR35 is making matters worse
Redwood ties the economy’s loss of 800,000 self-employed from the workforce since February 2020 as another blow propagated not solely by the COVID pandemic, but by tax changes related to IR35 in 2017 and 2021.
He says the tax changes make it too difficult for the self-employed to grow their businesses in the way they used to, particularly where they need business customers.
“Change the rules back,” he says.
Redwood foresees the Treasury claiming such a reversal as “a loss, though it should save the government money, especially where people move back into self-employment from benefits,” he says.
He sees this could be more than “offset by imposing a strengthened version of the civil service recruitment controls the Government is talking about.”
Anti-thesis to Conservative values
Dave Chaplin, CEO of ContractorCalculator welcomes Sir John Redwood’s “tenacity in calling for IR35 to be reversed.”
“We know that the legislation unfairly targets the self-employed and flexible workforce and is a drain on UK productivity,” says Chaplin, who adds that a full repeal is unlikely.
However, Chaplin does expect to hear more detail regarding the fixes to the “major structural defect of double taxation”. A flaw he says has seen contractors and firms paying taxes on the same income, effectively leading to marginal tax rates over 100%.
He calls this “the antithesis of Conservative values.”
Chaplin claims HMRC knew about this issue since 2018 but failed to properly inform MPs before their vote in 2020.
“Due to Ministers stepping in, we are expecting this fix to be implemented in the next Finance Bill,” he says.
However, more flaws remain. “There are still two other flaws that require attention, which formed part of the ‘fix or ditch’ campaign by ContractorCalculator in March 2023. Recruiters should not bear tax risk when HMRC overturn status decisions by hirers, and the appeals process needs strengthening by mandating that Status Determination Statements are passed to the worker. The government can quickly fix these issues with minor amendments to the existing legislation,” says Chaplin.
The CEO believes the reforms erode trust in the Conservative Party and hinder UK growth.
“Targeted legislative fixes are imperative to undo the damage to the self-employed and revitalise the flexible workforce,” he urges.
Do economists need to work from a new rule book?
Redwood’s and Chaplin’s views are not shared by all economists. Some economists argue that tax cuts would indeed lead to higher inflation and that they would also make it more difficult for the government to reduce the deficit. However, Redwood’s views are certainly worth considering as are Chaplin’s, given the UK’s current economic challenges.
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The Chancellor of the Exchequer, Jeremy Hunt, today (5 September 2023) announced that he will present the Autumn Statement 2023 to Parliament on 22 November.
The Office for Budget Responsibility (OBR) has been commissioned to prepare an economic and fiscal forecast to be presented to Parliament alongside his Autumn Statement.