The great tinkerer

Richard Wellings comments on the Budget for The Business online and The Spectator online

In Gordon Brown we have a Chancellor who has favoured complex and costly policy options over simple and efficient ones. Apparently oblivious to the growing burden of taxation and regulation, including spiralling compliance costs, he appears to believe that economic prosperity can be achieved through the intricate management of taxes, benefits and subsidies.

Over the last decade the tax and benefits system for families has become an unnavigable nightmare. Perverse incentives have encouraged couples to split up and discouraged career advancement. Businesses have also suffered from micro-management. There are countless schemes providing special tax concessions or grants, such as enterprise capital funds, small business loan guarantees and the business growth incentive scheme. Although the 2007 Budget appears to have reduced complexity in some areas, most notably income tax rates and capital allowances, overall it can be seen as a missed opportunity.

Certainly there was little sign of Brown simplifying the government’s environmental policy. A wide range of measures were announced including a competition to develop the UK’s first full-scale demonstration of carbon capture and storage, a review of vehicle and fuel technologies, a package to support biofuels, stamp duty relief for zero carbon homes, subsidies for energy efficiency and a rise in the climate change levy. In addition, Vehicle Excise Duty (VED) will rise from £220 to £400 for band G cars.

This latter change provides a further example of misguided meddling. VED taxes motorists even when their cars are stationary. In contrast, fuel duty is paid in proportion to the amount of carbon dioxide that a vehicle emits. By imposing large increases in VED for large cars, while at the same time limiting fuel duty rises to close to the rate of inflation, the Chancellor is providing few incentives for drivers to reduce their carbon emissions by using their cars less.

Yet large rises in road fuel duty would also be objectionable when other sources of carbon emissions are so lightly taxed. In his first budget, the Chancellor reduced VAT on domestic fuel to 5 percent - hardly the act of an environmentalist. If the government wants to reduce the UK’s carbon emissions a few simple policies would be far more effective than the current hotchpotch. The government should charge full VAT on domestic fuel and replace road fuel duty and VED with an appropriate carbon tax that would apply equally to all economic activities that fall outside the carbon trading system. These simple measures would be far more effective – and less economically damaging – than Brown’s complex tinkering.

See
The Business and
The Spectator for more analysis of the 2007 Budget.

See also
Living with Leviathan: Public Spending, Taxes and Economic Performance by David B. Smith and
The War Between the State and the Family: How Government Divides and Impoverishes by Patricia Morgan.