Osborne’s Budget chips away at the top of an iceberg

In this year’s Budget, George Osborne had the opportunity to bolster economic recovery by removing barriers to growth. Alongside some welcome proposals, he unfortunately also introduced a series of gimmicks that do little to address the high levels of tax and regulation that severely hamper entrepreneurs.

Perhaps most disappointingly, the Chancellor failed to reverse several recent tax increases that are on the wrong side of the Laffer Curve (counterproductive tax rises that lose the Treasury more than they raise). Room for manoeuvre is limited but George Osborne really should have been more specific about abolishing the 50p Income Tax Rate and should have reversed the increase in Capital Gains Tax. The reduction - and announced future reductions - in corporation tax are, of course, welcome.  

While there was talk of deregulation – for example, through tax simplification and the reform of the planning system – the proposals  are insignificant in terms of the overall burden of red tape. Hugely expensive regulations to meet environmental targets, for example, remain in the pipeline.

There has also been no serious attempt to address youth unemployment. Radical liberalisation is desperately needed here, including the abolition of the minimum wage and the removal of reams of burdensome employment law. The announced expansion of subsidised apprenticeships will do nothing to address the fundamental problem that state intervention has priced low-skilled young people out of the labour market.

The approach to business growth echoes the interventionist policy on employment. Twenty-one enterprise zones will be created with tax relief for firms locating in them. Enterprise zones have been tried before, of course. They create economic inefficiencies by artificially distorting the spatial pattern of economic activity. Businesses outside the zones also face higher taxes to pay for the tax breaks and activity may simply be displaced from one area to another. Worse still, the political imperative to make a success of the zones may encourage further government subsidies (for example, the c. £6 billion spent on transport infrastructure to regenerate London Docklands). Against this, the proposals to marginally liberalise the planning system more generally may bear some fruit.  

If Osborne had been serious about removing barriers to growth he would have turned the whole of the UK into a low-tax, low regulation ‘enterprise zone’. As it stands, the 2011 Budget is a missed opportunity to liberalise the economy.

It may be easier to take significant steps to simplify the tax burden when the Chancellor feels he has significant amounts of money to 'give away'. Otherwise, the risk of even a few losers from tax changes moaning far more loudly than gainers rejoice must represent a political disadvantage he feels he can do without. Having said that, though, I wouldn't hold your breath waiting for simplification. Taxes which in total take roughly half the national income are almost bound to be very complicated. The government, in my opinion, is right to make Step 1 identifying the government's disastrous financial situation and Step 2 outlining plans over the next few years for some (fairly modest) reductions in government spending. Step 3 would be indicating some major areas of government interference where it is proposed to substitute non-interference and potentially (over the medium-term) save significant amounts of money. Step 4, in due course, would then, finally, be to abolish some taxes, reduce the rates of other taxes, and SIMPLIFY the tax system. But this is a ten-year project.

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