Ruth Lee: If I were Chancellor, I’d rip away the red tape and simplify the tax system

AS this week’s Budget looms, there are some tantalising hints of what may be in the “Budget for Growth”, as it has already been billed.

For example, in an echo of the Thatcher era, the Chancellor has already announced plans for new enterprise zones (EZs), providing incentives to firms to create jobs.

There will of course be other announcements to help business. But the concern is that the total package will fall short of what is required.

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Let us be under no misapprehension about the size of the challenge facing the economy as we claw our way out of recession, facing tough spending cuts and higher taxes.

It is salutary to look back to the early 2000s and note just how Gordon Brown’s largesse drove growth. He really did spend as if there was no tomorrow.

Public spending was rising by more than five per cent a year at that time, after allowing for inflation, while the private sector was all but squeezed out.

Over the next four years (2011 to 2014), public spending will fall by an annual average of one per cent, in real terms, pulling growth down.

As a consequence, the private sector will have to grow by about five to six per cent annually if the quite modest GDP growth forecasts produced by the Office of Budget Responsibility for the Treasury are to be met. This is a very “big ask”. It is, moreover, all the more difficult as the recovery seems to be running out of steam, even though the spending cuts have yet to really start to biting.

There is, however, a precedent when public spending was held back and the private sector grew very buoyantly. This was in the mid-1990s after Britain’s blessed release from Europe’s Exchange Rate Mechanism. But circumstances were much more favourable then.

Our major export markets of Europe and the US were healthier, we did not have inflation to worry about, the banking sector was more robust and the economy was undoubtedly more competitive.

Over the last 15 years, Britain’s tax system has become less internationally competitive and regulations have been heaped on businesses. The British Chamber of Commerce estimates that the total gross cost of regulations introduced since 1998 was around £88.3bn in 2010. Small businesses find the increasing cost and complexity of regulations especially burdensome.

What would I do if I were the Chancellor of the Exchequer, or indeed the Business Secretary, to give businesses a major and much-needed boost?

Firstly, I would simplify, if not repeal, some of the most costly regulations. As small businesses particularly find employment regulations problematic I would start with them.

The Equality Act would be the first to go – unpopular though it would be in some quarters. Vince Cable has mooted the idea of improvements to the “costly and time-consuming” tribunal system – let us hope he delivers.

And I would wish to repeal and/or simplify the EU’s costly Working Time Directive, a bugbear of the NHS incidentally, though while we are in the EU, we are in no position to do this.

Well, the answer to that is to leave the EU. But this is for another day!

The tax system became even more fiendishly complex than it was before under Gordon Brown. Tax simplification is therefore a must. The Chancellor’s Office of Tax Simplification has already made sensible recommendations and I am hopeful that George Osborne will announce some first measures in his Budget.

I would wish to cut corporate tax rates quicker than the Chancellor already is doing, though the still-horrendous state of the public finances urges caution.

On the whole, I would not favour one sector over any other, but manufacturing industry is exceptional because so much is expected of it to rebalance the economy.

Two issues are particularly relevant. Firstly, manufacturing industry tends to be highly capital intensive. The decision in last June’s Emergency Budget to reduce the Annual Investment Allowance from £100,000 to £25,000 and cut back the capital allowances main rate from 20 to 18 per cent was therefore unhelpful. I would reverse this.

Secondly, some manufacturing businesses, including chemicals and steel, are very big energy users indeed.

But the Government’s “green” energy policy, driven by two very ambitious targets for cutting carbon dioxide emissions and increasing the contribution of renewables, is turning out to be very expensive indeed. (Wind-power is extraordinarily expensive).

Because of these policies, we have, in effect, very “dear” energy policy. High energy prices put many manufacturing plants at a competitive disadvantage, which will get much worse on current plans.

There is already a “green stealth tax” on electricity prices of more than 20 per cent for business consumers, which could rise to 70 per cent by 2020 – the “green stealth tax” for domestic consumers is, incidentally, about 15 per cent. It should be printed on electricity bills.

If I were Chancellor, I would press my colleagues very hard for a radical rethink of energy policy – a measure that is critical to putting Britain back on to the road to recovery and economic sustainability.

Ruth Lea is an economic adviser to the Arbuthnot Banking Group.