openEconomy

Put the business bosses in their place

Business complains about a tax levied on its most expensive input. No surprise there. And possibly even a good thing. But the big question is whether it is business bosses or citizens that should be judges of the overall tax system
Tony Curzon Price
Tony Curzon Price
9 April 2010

George Osborne wants to reduce National Insurance Contributions - essentially a tax on work - and pay for the £6bn cut by finding efficiency savings in the public sector. Labour retort that the savings will actually imply painful cuts – there is not that much slack in the system. The Lib Dems basically agree and suggest that the Tories would increase VAT to pay for the reduction in NICs.

There are two big questions this raises: is there an urgent question of economic policy at stake here, as the parties have seemed to imply? But more importantly, what are the questions on which it is proper for business bosses to use their voice, access and authority to influence political outcomes?

The central economic question, which the parties are not debating, is what the level of government borrowing ought to be. If we are in a Keynesian recession --- as most economists think we are --- then it is good to borrow (or even print money) to maintain public spending and demand in the economy. Essentially, we should be bringing forward as much spending as the world's lenders will allow us to. I wrote about what that limit is over here.

Does the NIC question impact on how much demand support the government will be doing? Not really. If it is financed by spending cuts or by a VAT rise, then, to a first degree of approximation, it will have no net effect on total demand --- there'll be losers (those who aren't employed in the public sector but would have been and consumers paying more VAT) who will be more or less balanced by gainers (lower costs, and possibly greater employemnt, for businesses). The only case in which this move has substantial borrowing implications would be if the Tories win, and if Labour were right that the efficiency savings were not there to be had; and if the Lib Dems were wrong and the Tories do no raise VAT; if the Tories were nevertheless to cut taxes and pay for it with more borrowing, then the policy should basically be welcomed as adding to the stimulus. However, that extreme case aside, the NIC issue does not touch on the one important economic question of the years ahead: when to withdraw stimulus.

So, recognising the question as largely an economic diversion, are business leaders right to object to a tax on work? Work is basically a good thing, so on the whole we should avoid taxing it. A thorough rebalancing of the tax system to systematically raise revenue from the activities that we should be doing less of would be very good – energy, road use, unsustainable consumption, waste, gambling, finance etc should all be considered as good public revenue-raising targets.

If that is what the business leaders had limited their comments to, I would be entirely with them: tax "bads" is motherhood and apple pie. But paying for a reduction on employment tax by cutting public services needs a debate about those public services, not about the benefits of a particular tax cut.The great disservice the CEOs have done is to confuse the two issues: as business leaders they are right to argue for a NIC reduction; but as businessmen, they should have nothing to say about how that is financed. That is a job for all of us as citizens: what public service do we want; what can we afford; and how should we raise the money. These are the big questions that should not be hidden by their confusing intervention.

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