U-turns on pasty and caravan tax are a bad omen for the spending round

29 May 2012

The failure of the government to hold its nerve on pasties and caravans shows little appetite to stick with difficult decisions. It also highlights the anomalies in the way we treat 'tax expenditures'.

If Defra gave a subsidy of £105m a year to bakers who put their pasties in an oven and then leave them on a shelf or the Department of Transport spent £35m every year subsidising the owners of static caravans we would laugh at them. The Treasury would be first in line demanding these absurdities be cut – and the Sun – today claiming a pasty victory – would be right behind them.

Yet instead, today the former have climbed down and the latter are claiming victory. But the decision not to levy the full rate of VAT on these items means all the rest of us have to pay a bit more in other taxes – or sack a few more teachers or nurses to achieve the government’s fiscal targets.

These sorts of special tax treatments are the missing part of the fiscal consolidation conversation – so-called ‘tax expenditures’. They do not appear in the public spending numbers or any departments’ budget. As a result they are subject to none of the usual scrutiny or values for money considerations. Indeed the tax expenditure line is one which is rising – as tax rates go up (like VAT to 20%), the value of special treatment increases. Indeed it is now £97bn (against total public spending of some £700bn) in 2011-12 (up from £77bn the year before!).

The Budget was an attempt to whittle away at some of these reliefs. As the table shows below many may be desirable. But they are also untargeted and often regressive – benefiting higher rate taxpayers or higher spenders more. Most have been around for a long time, and they have never been part of the sort of rigorous value for money test applied to much smaller spending items.

ESTIMATED COST OF TAX EXPENDITURES AND STRUCTURAL RELIEFS 2011-12

As the table above shows the biggest single item is the VAT zero and reduced rate. The items that benefit are detailed below – and within those broad categories are included some of the items the Chancellor decided to take on in the Budget.

ESTIMATED COST OF TAX EXPENDITURES AND STRUCTURAL RELIEFS 2011-12

At some point, as a nation, we need to decide whether we want to go on ‘subsidising’ those who consume and produce these items – or whether we would like to have a thorough review of which are worth keeping – and which not.

If the Chancellor had presented these changes within a more general set of moves to reduce the deficit by the most sensible measures possible, it would have been pretty hard to argue against these changes and a whole set of other anomalies. But picking them off a few at a time, in the name of tidying up, is a strategy that has backfired spectacularly.

As the Treasury gets ready for another tough spending round, it would be worth putting tax expenditures into play – and see if they can hold their own against other spending programmes or the option of lowering tax rates across the board. The best way to do it would be to open the whole area up to a thorough, transparent, independent review.

And meanwhile the government needs to steel its nerves for decisions that are much tougher than these if it wants to get close to the numbers the Chancellor set out in the Budget for future spending.

Further information

I would like to thank William Knighton for compiling the statistics used in this blog.

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One Response

  1. Phillip Ward on 29 May 2012 at 4:36 pm

    You make a powerful argument for at least looking at the relative benefits of tax expenditures versus other spending priorities. The problem is thinking of a practical way of proposing changes. If you can’t even get agreement on taxing a small fraction of the pasty market what chance food more generally, or even books and newspapers? If changes could be linked to some other policy agendas – and not just fiscal consolidation- it maybe that constituencies could be developed. So removing tax exemption from unhealthy foods as part of a response to obesity; capping the amount of fuel which is charged lower VAT to encourage energy saving; or transferring some of the VAT benefit from new build homes to home improvement to encourage maintenance of the housing stock could have supporters but presumably at the cost of increased complexity in the tax system.

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