Yesterday’s speech by David Cameron was yet another in a run of oratories about how much the public finances deteriorated under Labour – despite the budget deficit being £11bn lower than previously forecast – and the need for “painful” public spending cuts. No one can argue of the need to address the budget deficit, although it is disingenuous to suggest the UK is facing a Greek-type financial crisis. However, it is the methodology of addressing the deficit that is at question.

We all know what precipitated the current crisis we find ourselves in. Reforms under Thatcher & Reagan in the mid-1980s, the “Big Bang”, led to a period of unrestrained pursuit of profit – no matter the risk – by unfettered banking institutions. Thatcher dismissed the contract tax payers have with the government to pay for the public services that are needed to allow society to function as a whole when she infamously declared, “There’s no such thing as society.” Where did this take us? It left us at the mercy of the markets where the UK Gini coefficient – the scale the illustrates the changes in income equality – rose sharply before levelling off under John Major’s premiership, before a dip under Blair/Brown. The last Labour government does not get off scott-free here either, as under Gordon Brown’s latter years, the Gini coefficient increased yet again, as reported in the Compass document, “In Place of Cuts – Tax Reform to Build a Fairer Society (Irvine et al). It is apparent that the system of taxation is not “fit for purpose” and is only serving to increase income inequality.

Public sector spending isn’t an unnecessary evil that can be cut at will. Making cuts to public spending ignores the pressing need – a need ignored by the previous Labour government as well as the current and previous Tory administrations – for a serious reform of tax to be carried out to ensure taxation is fair, and that we have a well funded public sector, upon which many people rely on therefore negating the need for cuts. Cutting public spending risks putting the country back into recession. The recession of course could have been a lot worse had the previous government not been forced into bailing out the banks to prevent a full-blown depression, which would have catastrophic effects on Britain. But making further cuts when economic recovery is tenuous still risk pulling us back into recession, exacerbating the crisis we find ourselves in. Tax revenue will decline further, benefits will increase, leading to more cuts – the cycle goes on. Its appalling that the poorest are paying for the top earners in this country being bailed out for their reckless risk taking to the tune of nigh-on £100bn. Thanks to them, people who live in comfort, the poorest and most vulnerable face their lives being blighted. To suggest, “we’re all in this together, and will share the pain” is complete nonsense. Cuts to jobs, pensions and benefits will crush the poorest sectors of society, while those sitting on vast fortunes, and inflated pay packets jacked up by obscene bonus payments will suffer no ill effects.

On to the tax system then. The Compass document I referred to earlier notes that the lowest 10% of earners pay a staggering 46% of their gross income in direct and indirect taxes whereas the highest 10% pay 34% of gross income in direct & indirect taxes, despite earning, in average, 10 times more. How is this fair? Murphy in “The Missing Billions” estimates that the UK Exchequer loses £13bn per year through LEGAL tax avoidance. That’s just for individuals alone.  In 2008, HRMC disclosed that the total loss to the Exchequer from tax avoidance and evasion was up to £41bn per year. Taking the top end figure of £41bn, this would almost plug the deficit gap of £45bn for the period 2014 – 2018 estimated by the Institute of Fiscal Studies. Reforms would result in fairness, and a crackdown of avoided tax. Substantially increase tax revenue, and the need for cuts is alleviated!

It seems clear that a more fair and painless means of addressing the budget deficit would be to reform the tax system and crack down on avoidance and evasion measures. It’s a myth that UK taxes are too high. According to the European Commission (2009) Taxation Trends in the EU, the UK ranks 17th amongst member states in terms of the top rates of personal tax – that’s alongside Greece, Hungary & Poland. Plenty of scope to increase tax revenues at the top end. A radical adjustment of the tax system should ensure low earners pay less tax in total and high earners pay more, although care would be required to ensure there is no disproportionate increases in tax paid when income increases. Byrne & Ruane (2008) indicates the changes in post-tax income where a more equitable system is put in place. Instead of the lowest 10% paying 46% of their gross income in tax, that would reduce to 12%, rising to 55% for the top 10%. The total tax take for the lowest 10% would fall by £3,096 based on an average gross income of £9,076 per annum, where as only the top 20% of earners (£54,609 gross income per year – £11 more tax take, £94,524 gross income per year – £19,707 more tax take.) This would have the added benefit of lower welfare dependency at the lower end of the earnings scale.

Don’t be fooled by the myth that higher taxes will mean higher avoidance. The Compass report notes that research by the Work Foundation debunks this myth. If the top rate of tax is increased, and reforms to the tax system minimise avoidance and evasion, the effect will be minimal – tax revenue will increase.

The Compass report proposes a number of reforms, which I can’t disagree with;

  • · A top rate of 50% for earnings over £100,000 per annum (most could struggle by on that kind of income
  • · Removing the upper limit on National Insurance Contributions by employees, and making investment income subject to NICs
  • · Introducing a minimum tax rate for gross incomes of £100k & £150k
  • · Restoring the 10% tax band up to £13,500 pa & the 22% basic rate.
  • · Increasing Council Tax multipliers above band D.

These reforms could raise between £4.7bn and £18.9bn per annum. At the top end of those estimates, that would half the budget deficit in 4 years without the need for cuts. Of course, there’s anti avoidance measures that should be considered that would increase tax revenue. UK Tax law is hideously complex, and is loaded in the favour of those capable of employing clever tax accountants. Some legal avoidance measures are plainly ridiculous, such as allowing tax payers to transfer assets to a partner to avoid paying Capital Gains Tax. I suspect some Members of Parliament would be aghast at the thought of that! There are countess avoidance measures in tax law that allow for tax payers to minimise what they should be morally obligated to pay. Public services benefit us all, yet the most wealthy do all in their power to avoid paying the those services meaning the poorest pay the price.

I’d urge David Cameron, Nick Clegg and George Osborne to call a halt to swinging cuts that will destroy lives, and make due consideration of reforming the tax system to make sure it is equitable, and minimises the opportunities to avoid paying tax. The benefit to the Exchequer would be considerable, and would avoid the need for cuts to be made. In the interests of fairness, and to build a society where the poorest do not subsidise the richest, let’s not let an antiquated tax system herald in an era of devastating spending cuts. That’s not to say all cuts should be avoided. ID cards have been rightly cancelled by the current government. They were expensive and a massive infringement of civil liberties. Trident – a key policy pledge now ditched by Nick Clegg – would present a massive saving, as would the hideously expensive Eurofighter project. Closer co-operation with the United States could alleviate the need for expensive additional defence spending, saving the tax payer an estimated £4bn per year. These cuts plus a reform of the tax system would cut an estimated £23bn per year from the deficit, eliminating it within 7 years without the need for cuts to child trust funds, tax credits, benefit etc. It seems, sadly, that ideology is driving these cuts and those that again didn’t vote Tory will suffer the consequences.