IoD Warns Against UK Tax Rises

by Jason Gorringe, Tax-News.com, London

21 June 2010

Following the release of its pre-budget representations, the Institute of Directors (IoD), has warned against tax rises and pushed for significant spending cuts.

“We are at a fork in the road for fiscal policy” says the IoD in its representations ahead of the emergency Budget. “With the right decisions prospects for recovery (aggregate demand) in the short-term and economic growth (aggregate supply) in the long-term could be enhanced. But there is also a risk that the wrong decisions could hasten a double-dip recession and damage long-term competitiveness”.

The IoD says that the most important measure in the Budget should be deficit reduction which goes deeper and faster than financial markets expect. The IoD has hardened its position on deficit reduction and is now calling for a cash squeeze (as compared with a real freeze in spending) over the 2011-12 to 2015-16 period. Closing the structural deficit alone is not enough, it says. The overall deficit in public sector net borrowing needs to be almost eliminated as well – over the course of the Parliament, says the IoD.

Deficit reduction needs to be overwhelmingly based on lower public spending the IoD believes. The IoD has consistently argued for a 4:1 ratio of spending reduction to tax increases. The IoD states that ideally all of the adjustment should fall on spending but if taxes are to rise the focus should be on indirect taxation. Higher direct taxation in particular would risk a double dip recession and also undermine the long-term incentive to work, save and invest, notes the IoD. The IoD Budget representations identify the 7 keys to a successful expansionary fiscal contraction.

IoD Director-General Miles Templeman said:

“Next week’s Budget needs to set out a big deficit reduction package, but the nature of the package is just as vital as its size. Raising taxes significantly would ensure that we fail to get a strong private sector recovery, killing off the growth we are trying to create. Cutting public spending is the necessary course of action, and should be accompanied by measures to ensure that the resources lost in the public sector are able to be picked up by a strongly recovering private sector.”

He also said:

“We don’t think rapid deficit reduction based on lower spending will undermine economic recovery. At times of fiscal crisis the normal rules are switched off. There is very strong evidence from economic history over recent decades, that we can have an expansionary fiscal consolidation. The immediate direct impact of lower public spending is to lower GDP but indirect effects quickly kick-in to raise private sector spending. The silver lining here is that tight fiscal policy might help maintain near zero interest rates for years not months.”

He went on to say:

“The tough Lamont-Clarke fiscal tightening, with 600,000 public sector job losses in the mid 1990s, did not prevent sustained economic recovery. Also, the period of fastest economic growth under Labour was during its first 2 years in office, when public spending fell sharply as a proportion of GDP.”

The IoD Budget representations also include:

• A warning that the shape of economic recovery is likely to be closer to an L than a V – one L of a recovery! The IoD forecasts 0.9 per cent GDP growth in 2010 with just 1.9 per cent in 2011. The IoD Budget representations identify 7 economic forces likely to dampen recovery.
• An observation that if the cyclical upturn is much more robust the inflationary risk will force the MPC to reverse quantitative easing. This economic cycle would then look more like a square root symbol, with strong growth which then levels off.
• A call to reduce public spending without significantly harming the capital projects, particularly in energy, transport and ICT infrastructure, that are vital to future growth.
• A call to ensure that the effect of the national insurance increase is fully reversed.
• A call to reduce the main corporation tax rate, to make business-friendly reforms to the controlled foreign companies regime, and to consult before making wider changes to the corporation tax system.
• A call to accompany any increase in capital gains tax rates with generous reliefs. It is vital to protect long-term investment and those who invest in businesses where they work.

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