Liberal Vision

Budget Reaction: Is ending NI a good idea?

A few cheers and jeers in today’s budget. The airwaves are full of detail so we will focus briefly on a selection of issues. This is not a comprehensive analysis.

Cheers

Raising tax allowances is essential to increase the incentives between work and benefits. It is not a redistributive anti-poverty measure, it is one that makes exiting poverty far easier for those who are prepared to work.

Reviewing the 50% tax rate is probably the only way, politically, it can be ditched, and likely then only when the economy is better recovered.

Cutting fuel duty and suspending the escalator is sensible. The Exchequer loses little from this, whilst the political message is powerful

Jeers

Although the Budget predicts reduced deficits by 2015, any deficit at all means more debt. Public spending is clearly not being cut fast or hard enough to protect future generations from our waste today.

The flip-side of the fuel duty announcements was the introduction of a Fair Fuel Stabiliser paid for by a levy on production. There is already a 20% special tax on UK oil and gas exploration. That has reduced the attractiveness of the North Sea for investment, in turn reducing returns. The costs of another 12% levy will also be passed on to pension funds and in reduced investment which could undermine any relief for consumers. The Chancellor should just cut duty when global oil prices are high.

Smokers get another beating with 2% rise above inflation. It is already the case that 21% of the tobacco consumed in the UK comes from illicit trade, i.e. organised crime. This is driven principally by relative national tax rates. It is highly profitable to smuggle and counterfeit, enforcement and punishment are weak. Counterfeit products tend to be more unhealthy, criminal profits fund more crime. A technical reform to mitigate against differential impacts on low and high cost brands misses this point. In the long-run British duty rates need to be sensitive to the pace of change in other countries. That reform is overdue. Providing another case-study in why prohibition doesn’t work is unwise.

The Big Change

Merging National Insurance and Income Tax does sound sensible. NI is effectively a stealth income tax and is masks just how extreme and high British taxes are by international standards. Such a change will make the sort of tinkering enjoyed by Gordon Brown much more difficult.

The problem, other than the possibility of a stealth rise on upper-rate payers in the process of change, is that national insurance is in itself a better idea than general taxation as a way of funding welfare.

When introduced by a Liberal government it was a proper insurance scheme for worklessness and old age. As recently as the 1990s the Liberal Democrats believed it should be used to fund the NHS.

Proper insurance is hypothecated, i.e. spent on a specific thing, not on anything the government fancies. The more hypothecation there is, the less the state can do as it pleases. For that reason tax hypothecation is vigorously opposed by the Treasury.

But that constraint protects taxpayers. It acts as a break on the kind of welfare ramping that has led to the current trillion pound debt, and even larger unfunded state pension liabilities.

Hypothecation is also more personal, people can see how much welfare costs them. Transparency engenders responsibility.

Another benefit of insurance is there is no need for the state to be the monopoly supplier. Similar to David Laws point in the Orange Book about health insurance. Offering people choice in providers of welfare insurance would be another check and balance on state waste.

The proposal is now subject to a long review, so we cannot say whether these issues will be taken into consideration, but it would be a historic quirk if this liberal coalition ended one of the main achievements of the last Liberal government, 100 years on.