No such thing as a free lunch

Additional public sector funding is not without its drawbacks, explains John Redwood.

Several parties are out to show they can deliver more money to public services without hurting most voters. The Lib Dems say they will increase Income Tax by 1p to deliver £6bn more for the NHS and social care. Labour argue for a big hike in the Corporation Tax rate to pay for a wide range of extra public spending and various expensive renationalisations. These views are based on two common fallacies in UK debate.

The first fallacy is an extra few billion will make all the difference. The truth is all parties in government do increase the spending on the NHS, social care and other priorities every year, and all wish to see these services properly funded. Since the Conservative led coalition entered government, total public spending has risen by 20 per cent from £669 bn to £802 bn. Health spending has gone up more, by 23 per cent, from £96bn to £117bn. The Conservative government has promised another £8bn to the NHS and £2bn more to social care, and will doubtless review the figures regularly to see if they are enough or need increasing if re-elected to government. Just adding £6bn as a one off will not suddenly transform the NHS, I doubt there is a thought through budget of how to spend that money and what improvements it would buy. The extra pound has no magical powers not shared with the pounds already being spent.

The second fallacy is the idea of painless tax rises. One penny on Income tax rates sounds modest. That is a five per cent increase in the standard rate, a 2.5 per cent increase in the 40 per cent rate and a 2.2 per cent increase in the 45 per cent rate. It means hundreds of pounds extra for most earners. That is money which families cannot then spend on their priorities.

The proposal for a big rise in Corporation Tax might well backfire. Having a low rate by international standards is one of the ways the UK attracts substantial inward investment, building a strong presence by many dynamic international companies here. Over the period when the reductions in rate have been put in, our revenue from Corporation Tax has gone up. Why wouldn’t we lose some revenue if we push the tax rate up, especially at a time when the USA is planning a major move the other way. I have no wish to be a soft touch for big business, but it does seem we are finding the right levels of Corporation Tax to get them to pay more.

In 2009-10 the Corporation Tax rate was 28 per cent and the tax take was £36bn/ £6.4 bn of that came from North Sea oil. This year the rate is 19 per cent and the estimate is for £46bn of tax revenue with no revenue from North Sea oil. The take has gone up in recent years despite a major reduction in North Sea volumes of output. So, by cutting the rate from 28 per cent to 19 we have gained 28 per cent more revenue, or an impressive 55 per cent if you adjust for the ending of North Sea taxable output.

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John Redwood MP
John Redwood MP
John Redwood is the Member of Parliament for Wokingham in Berkshire. He was formerly Secretary of State for Wales in Prime Minister John Major's Cabinet. He is currently Co-Chairman of the Conservative Party's Policy Review Group on Economic Competitiveness.
  • getahead

    Thon,
    Well it’s a comfort that the debt is “mostly” in house.
    So is it the government borrowing money or is it pension funds etc buying bonds? If it is the latter, how does the government reduce debt?
    I can’t understand why anyone would buy bonds when the return on them is so poor. I suppose that is why many pension funds, mine included are also in debt. Just musing. Have a good day.

  • Thon Brocket

    Bondholders, mostly institutional. That means, mostly, pension funds. You want to mess with them?

  • Rocle

    You missed the assumption that spending more means a better service rather than more waste or bigger salaries

  • simonstephenson

    “So, by cutting the rate from 28 per cent to 19 we have gained 28 per cent more revenue, or an impressive 55 per cent if you adjust for the ending of North Sea taxable output.”

    It would be more justifiable to use “at the same time as” rather than “by”, since it is by no means proven that the increased tax take has been the direct result of the rate reduction. Consider the situation, for example, where a person’s taxable income goes up from £80k one year to £100k the next, while the tax rate falls from 20% to 18% between the two years. In year 1 the tax take would have been £16k and in year 2 it would have been £18k, but would it be correct to assert that the increase in the tax take was due to the reduction in the rate of charge?

  • ratcatcher11

    To the left, ideology comes before practicality every time, that’s why they are always reinforcing failure and constantly repeating the same mistakes.

  • Grimble has no point. He can’t address John Redwood’s arguments, so is going for a distraction instead.

    Admittedly, it’s a very amusing clip (and I wouldn’t be surprised if John is able to manage a wry smile at it by now); but it in no way detracts from John’s case here, which he has made with his usual careful and logical approach.

  • Derek

    Why should we be beholden to a promise that the public would never vote for of giving billions of foreign aid (our money not politicians) to the most corrupt countries in the world, knowing most of it will finish up in offshore bank accounts? Nigeria is an oil state. Nigeria could be a rich country if this money was ever allowed to trickle down to the populace. Why boost elite politicos multi-billion offshore bank accounts at our expense?
    It’s a bad as the auditing-free EU where anything goes with our hard-earned cash.

  • getahead

    And your point is?

  • getahead

    House of Commons Library says £49.1 billion. To whom is this interest paid?

  • NeilMc1

    Seems the Left are not interested in Laffer and would rather fight a Dennis Healey ‘class war’ and receive less money by ‘squeezing rich until the pips squeek’!

  • grimble55

    No such thing as the Welsh anthem, eh Mr Deadwood?

    https://www.youtube.com/watch?v=GzBq0n8dxFQ

  • rolandfleming

    Every tax form should include a pie-chart showing how government spending is divided. DWP should be sub-divided into pension and non-pension budgets.

  • Dougie

    Vote Labour: we spend your money so you don’t have to.

  • Tad Stone

    Best figure I can find is £62 billion!!!!

  • Mr TaxPayer

    I heard something the other day along the lines of debt interest being the 3rd or 4th biggest item of government spending and that if it were a Department only the NHS, DWP, MoD and Education departments are bigger.

  • Philip Meikle

    ..12billion of foreign aid is a substantial amount. 5 to the NHS and 5 to Schools and the rest can reduce the deficit.

  • Tad Stone

    As usual, very sensible comment. It would be interesting to know how much we pay in interest on current debt, and how much extra we would need to pay to cover Labour’s debt ridden manifesto.

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