We asked some of our writers to come up with the one money-related policy they wished the next government would introduce – here’s what they proposed…
Impose capital-gains tax on first homes
Merryn Somerset Webb
When I had lunch with Nick Clegg a few weeks ago we talked about how best to tax housing. He is pretty wedded to his mansion tax, but I had a go at persuading him of the case we’ve often made here: that stamp duty should be dumped and the lost revenue made up with an inflation-linked capital-gains tax (CGT) on first homes (in other words, on the home you live in as well as investment property).
• How to position your portfolio for polling day
• The politicians’ slash and burn plans
Stamp duty is a rotten tax. That’s largely because it is generally paid out of money we have already paid income tax or CGT on. I hate double taxation. But it’s also a bad tax because it makes the cost of moving house so high that it drastically inhibits labour mobility in Britain. At a time when unemployment is rising fast, that’s not good. CGT on houses, on the other hand, is paid only out of unearned (and previously untaxed) income. It would have less impact on mobility. Better still, it would change the idea that making heavily-leveraged bets on house prices is a kind of tax-free saving. That might divert some of our savings out of housing and into more useful investments. This is not a policy that anyone hoping for any votes can suggest pre-election. But I’m hoping it might see an airing post-election…
Get money flowing into the economy again
James Ferguson
All we hear is politicians arguing about whether to raise taxes more or spend less. We should do neither. This is not a typical post-recession recovery.
What we’re facing is a banking sector insolvent in all but name. In Japan, on both occasions that the government tried to lower the deficit by raising tax rates, the economy was so fragile that tax revenues actually fell. Similarly, when fiscal stimulation is pulled from a post-banking-crisis economy, the only logical expectation is a double-dip recession (or at best a very close shave).
The problem is that the conduit for monetary policy transmission is blocked. It will stay that way until the banks are fixed. That means bank lending stays negative and the private-sector economy stays vulnerable to shocks. Until their balance sheets are fixed, banks won’t increase lending. And we won’t know their balance sheets are fixed until they start growing lending again. Until then, the new government needs to do two things. First, they must help the banks work through their bad debt problems rapidly by generating new capital and supporting a clearing price for real estate to keep collateral values up. Second, they need to help households and small businesses gain access to credit from non-bank, even public sector, sources. Do that and we really could dare to hope once more.
• James Ferguson is head of strategy at Arbuthnot Securities.
Break up the banks
Tim Bennett
Only huge, taxpayer-backed bail-outs saved the day after the last banking crisis in 2008. Now, with interest rates at record lows and Western government borrowing at record highs, there’s no ammunition left to deal with any future crisis in a similar manner. Yet we’re doing nothing to prevent the same thing happening again in the future. Just beefing up regulation won’t do it. Regulators are never close enough to a business to stop it from failing. And they shouldn’t even try. The bankruptcy of a badly run business, such as Lehman Brothers, is a healthy feature of a free market economy. The right solution is the one the banks don’t want to see. They must be shrunk. If a single component of any system can destroy the entire system, then the system must be redesigned. So banks should be forced to split risky activities – such as proprietary trading (where a bank gambles with its own money), hedge funds and private equity – away from the bread-and-butter business of accepting deposits and providing loans.
Banking, as Bank of England governor Mervyn King once noted, must go back to being boring. Smaller, lower-risk savings and loans organisations, subject to strict rules on minimum capital, could still enjoy an implicit taxpayer guarantee. Meanwhile, the banks that choose to risk their own, and their clients’, capital in high-risk activities must be left to fend for themselves – and be allowed to fail next time round.
Shrink the government
Tim Price
We know that the state of our national finances is fraught and that draconian spending cuts will be needed to bring government debts down to a manageable level. The outcome will be some form of so-cial distress, however bitter the medicine.
But what I would like to see after the election is an acknowledgment that it is businesses, and not politicians, that create wealth. The best thing that any new administration could do would be to get out of the way of value-creating industries, rather than have them crushed beneath ever higher burdens of tax and regulation.
This is not a bankers’ charter. It is plain that the financial sector became over-mighty during the last decade and is now suffering a wholly justifiable backlash from politicians and voters alike. The banking sector is bust and we need to move on. But the Blair and Brown legacy is of a million jobs lost in manufacturing industry, only for those jobs to be recast as largely valueless employment in the service of the welfare state.
It is an uncomfortable truth for politicians, but the best solution for a more robust economy is smaller government. No national champions, no ineffectual calls to protect key sectors of the economy. Let Schumpeterian creative destruction do its worst.
• Tim Price is director of investment at PFP Wealth Management. He also edits The Price Report newsletter. Call 020-7633 3637 for more.
Scrap tax credits
John Stepek
If ever there was a more wasteful form of tax and benefits system put in place than the tax credits system, I’d hate to see it. Firstly, it’s expensive. It costs HMRC £2.46 in administration costs for every £100 paid out by the tax credit system. That’s a lot to pay for a system that just recycles money from one set of people to another. It also creates odd economic disincentives. Because of the way tax credits work, it’s possible for some low-income workers to end up with a marginal tax rate of near enough 70%. The complexity of the system means it’s hard to tell how badly you’ll be hit. Landing a job becomes less attractive if you can’t be sure how much better your financial circumstances will be if you take it. Tax credits also subsidise low-wage employers by enabling them to pay people less than a living wage, which is then topped up by the government.
There’s no need for those on low incomes to suffer if they’re scrapped (and it’s hardly just those on a ‘low income’ – the other ridiculous thing about tax credits is that they’re paid to households on well-above-average incomes). Simply use the money saved to raise the personal allowance. That way people on low incomes can be assured that every extra penny they earn up to a specific threshold will go straight into their pockets – and they don’t have to faff about with claim forms.
Kill the quangos
David Stevenson
No one seems to know exactly how much Britain’s Quasi-Autonomous Non-Government Organisations (quangos) are setting us back. Or just how many there are – some guesses are as high as 1,200. But quangos – ranging from the British Potato Council to the Deer Commission for Scotland to the School Food Trust to Culture East Midlands – could be costing the country as much as £90bn a year of public money, according to the Taxpayers’ Alliance (TA). Compare that with our annual government budget shortfall of around £160bn.
Clearly, some quangos, like the Police Complaints Commission, are handy to have around. The police won’t regulate themselves. But many quangos exist solely for political reasons. As the TA’s Ben Farrugia puts it, “public spending through the semi-autonomous sector continues to grow, making gov-ernment more remote and less accountable to the people who pay for it”. Meanwhile, the main purpose of the quangocrats is “to preserve their incomes”, says Tim Ambler at the Adam Smith Institute.
When the state coffers are full, maybe we can afford lots of quangos (although I’d rather my income-tax bill came down instead). But in these tough times, having a proper review of the sector and taking an axe to all but the most critical quangos could make a much bigger dent in the deficit than almost anything else I can think of.