Pensioners, pasties and philanthropists: how to avoid further budget fiascos

12 April 2012

George Osborne suffered the indignity of ex Brown spin doctor, Damian McBride, asking why he let HMRC slip by some eternal budget starters that previous chancellors had had the political nous to reject (conveniently forgetting the disaster of the 10p tax rate in the process). But all chancellors will suffer until we make tax policy better.

When is avoidance not avoidance? When it’s propping up the Big Society – and a cornerstone of the culture secretary’s strategy to save the arts from the impact of the spending cuts.

That is the problem confronting the chancellor and the prime minister as they contemplate the last week’s furore over the impact of capping tax relief for the rich.  What appeared to be a reasonable measure to make sure that the Lord Granthams paid tax at a rate somewhere approaching the rate of the Carsons has now turned into a row about the future of charities. Not surprisingly, when surveyed, they all claim they will be hit very badly (a question to which the answer is an almost inevitable yes).

There is a reasonable in principle case to be made for saying that the personal philanthropic choices of individual rich people should not drive where we allocate “tax expenditures” (the other way of looking at tax reliefs). Better for them to pay proper amounts of tax and then let decisions on what charities the taxpayer wants to support be made by accountable politicians. But that is not the argument the chancellor made, and so far only the Guardian in a leader today has dared make it. Instead the Treasury has given the impression of being taken by surprise by the reaction.

Just as it was by the reaction to the attack on pasty tax in the name of levelling the playing field on the VAT borderline on hot takeaway food. And in how pensioners failed to cheer the simplification proffered by the chancellor in the Budget by the removal of their slightly higher personal allowance.

So what is going on?

The chancellor – like so many other chancellors before him – produced proposals which did not need scrutiny by his cabinet colleagues who might have pointed out the inconsistency of his plans with other key threads of government policy.  He did not involve any outsiders in the development of his policies. He did not need to produce a White Paper setting out his proposals. All he had to do was get the “quad” to sign up – and they undoubtedly were focussing on the big ticket items of the 50p rate, the threshold and the mansion tax.

As we have argued before tax policy making in the UK violates most of the policy fundamentals we set out in our report, Making Policy Better last year. In particular, our current budget process is spectacularly weak on external engagement and anticipation of likely reaction and far too often tax policy is very poorly designed.

When he came to office, the chancellor promised to make tax policy better. He set up the Office for Budget Responsibility to make fiscal forecasting more independent and transparent and the Office for Tax Simplification.  But those have not prevented the current, predictable, problems.

A review of the success or otherwise of the 2004 O’Donnell reforms which gave the Treasury responsibility for tax strategy and diminished the policy role of a merged HMRC is long past its due date. That, combined with a lessons learned exercise on the travails of the 2012 Budget, is now needed to redesign the process to bring it into the 21st century and reduce the potential for future budget clangers.

Share this post:

Comments (4)

  1. paul toplass on 12 April 2012 at 1:45 pm

    I think that the whole tax issue needs bringing up to date the law which was established in the last two hundred years or so has outlived its use.What we need to see is radical rewriting of most of the rules.It would be a good time to look at the land and to tax it appropriately as i believe its the next genie to be let out of the bottle.

  2. [...] Jill Rutter at the Institute of Government, says that the charity tax raid, along with the pasty tax, granny tax, and other tax debacles, arises from a fundamental brokenness in our tax policy system: tax policy is bound to fail because, uniquely amongst policy, it’s devised by The Quad (PM, Deputy PM, Chancellor, and Chief Secretary) in isolation with no outside consultation or discussion.  Like much philanthropy, in fact. [...]

  3. John@baby shoes on 15 April 2012 at 10:25 am

    Yet again I think that a potentially good idea has generated bucket loads of bad publicity due to poor communication and an “across the board” approach to charity. Surely, a clearer definition of what constitutes a charity and why some might not qualify for tax relief must have been possible.

  4. Mark O'Sullivan on 18 April 2012 at 6:31 pm

    Another issue is whether the Treasury are adequately resourced for the job. When the Civil Service overall was reduced by about a fifth of its staff in the mid-1990s, Treasury were volunteered to set an example, and lost a third of theirs (though some perceptions were that the expenditure divisions were already pretty tightly staffed at the start of the exercise). While they pulled in some extra in 2008-09 to deal with the banking crisis, the extras are by now well on their way out again as a result of the Osborne cuts announced in 2010. On top of that, their turnover rate went up between 2010-11 and 2011-12 from about 23% to about 30%, and, even though they are a department which habitually has a lot of people coming and going on secondment, this is a very high figure.

    There must be a question whether capacity is adequate, and also whether too much zealousness by both Conservative governments has caused a weakening of institutional culture and expertise.

Blog: Permalink