Tuesday, 7 October 2014

Structural and cyclical deficits

Institute for Fiscal Studies director Paul Johnson has posted an Independent View on LibDem Voice which lays out the problems facing the UK government attempting to reduce the budget deficit, the resulting debt and the debt historically accumulated. Two graphs in the article usefully separate out the components.

Mr Johnson writes that the deficit "is still hovering around £100 billion this year" and that "The Office of Budget Responsibility estimates that around £70 billion of that deficit is structural" leaving around £30 billion cyclical deficit, that is, £30 billion which should disappear in the good times. What worries me is that we are now entering the good times, judging by the GDP figures, and that tax returns are below budget estimates. It is unlikely that the poor weather in August was a major factor in this, nor that a drier than usual September is going to improve the I&E account by much. This is the wrong time to raise the start level for the 40% income tax rate, still worse to reduce that rate. If higher incomes really are drifting up, then the exchequer should take its fair share. This is the time, in George Osborne's memorable phrase, to start fixing the roof.

But there is still a mystery surrounding the missing tax income. Part of the story may be filled by several tax loopholes, which Private Eye has been banging on about for years.

One loophole was identified by Gordon Brown when shadow chancellor during the last Conservative administration, but not closed by him during thirteen years of a Labour government, that is, "non-domiciled" status. Another, a favourite of hedge funds, is an "investment management" exemption which allows funds registered offshore - say, in the Cayman Islands - to be run from London without being taxed in England.

A third was actually created by Labour: the limited liability partnership.

It is unsurprising that a Conservative-dominated administration has moved to correct these sins of omission and commission, helpful as they are to City spivs, only round the edges. Nor can we expect the neo-Thatcherite UKIP to do this, but surely these are two of the loopholes whose closing would contribute to the restoration of social security which will feature in the LibDem manifesto for 2015.

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