Monday, 30 April 2012
UK tax collections lower in 2011 than in 2008
Whether we tax the rich more or punish the poor, one thing is clear, HMRC collected less revenues in 2011 than it did in 2008.
The economy is smaller, of course. Nevertheless, the New Labour tax cuts - the 2 percent VAT reduction, the stamp duty holiday - also hindered collections. Moreover, these policies did little to restore growth. New Labour's enduring legacy was to dig a big fiscal hole and push the economy into it.
When the coalition arrived, these tax cuts were largely reversed. Revenues have recovered somewhat, but expenditures have continued to grow. The deficit remains dangerously bloated.
The big question is whether we can realistically return to the collections levels of 2008. Back then, the economy was buzzing as mortgage equity withdrawal and rising household indebtedness boosted up consumption. This pushed up VAT receipts and customs duties. Home sales were also higher, generating large stamp duty receipts and higher capital gains tax. The economy was growing nicely. With higher profitability, firms were paying over lots of corporate income tax.
The housing boom has gone, and despite near zero interest rates, the Bank of England has failed to revive property prices. Thus, it seems we are stuck. Tax revenues appear to be permanently lower.
This permanent revenue loss points to need for an equal adjustment on the expenditure side. Yet, we seem reluctant to embrace this new reality. There is this vague and ill formed idea that if only we could tax more heavily the ephemeral one percent of rich people, then our fiscal problems would disappear.Taxing the wealth is never easy. Our complex tax legislation offers ample opportunities for avoidance, and that isn't going to change anytime soon.
Populism will not resolve our fiscal difficulties. We have to look to fundamental expenditure reform. We need to re-prioritize, and reduce expenditures.
It will be a painful and divisive adjustment.