One of the depressing features of the last general election was that the electorate didn't have much of a choice. There was effectively a non-aggression pact on vital issues of public spending and taxation. The way Labour and the Conservatives formed policies made it likely they would give similar answers. Each party has core voters who are taken for granted and ignored. Then there are those who would never vote for that party, who are also ignored. It's the swing voters in marginal seats who are wooed. As both parties are advised by marketing wonks from similar backgrounds, they tend to register similar findings from their focus groups. And so similar policies are advanced.
If the main concern is to appeal to "Worcester Woman" or "Mondeo Man" then politics will go nowhere. The state will grow relentlessly because policy advisors believe that public spending cuts are deeply unpopular. There are two reasons for this. One, the supposed benefits of pouring public money into schools and hospitals are enjoyed by a large section of the electorate, while the higher tax burden to pay for it comes from a narrower base 50% of income tax comes from 10% of taxpayers. Two, the public still seem uncritical of higher public spending.
An ICM opinion poll in December 2005 found that 49% of respondents thought that "government services such as health, education and welfare should be extended even if it means some increases in taxes". Yet, in the same survey, 61% of the respondents disagreed that "extra spending over the last few years has resulted in real improvements in the NHS". The implication is that a minimum of 10% are in favour of "tax and spend" for no apparent benefit!
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Where is the political will to cut tax?
The survey also revealed that just 16% of respondents believed that "taxes should be cut even if it means some reduction in government services such as health, education and welfare". So supporters of big government outnumber those who want the state downsized by three to one. So the opposition faces a dilemma.
On the one hand, engage in a debate that challenges the premise that public spending is good. It could use its powers of persuasion so that voters' hearts sink rather than swell when the Government announces gleefully that it is spending more and more of our money. On the other hand, the opposition can take the line of least resistance, concede that tax cuts "put the electorate off", and pander to the "tax and spend" masochists. The Conservatives under David Cameron have ostensibly chosen the latter option.
But I am encouraged by shadow chancellor George Osborne's plans to scrap stamp duty on share transactions. Stamp duty was introduced in Britain in 1694 under "An act for granting to Their Majesties several duties on Vellum, Parchment and Paper for four years, towards carrying on the war against France." It seems absurd that it is still levied on electronic share trades in the 21st century. You would have thought that it was ripe for abolition given the modernising zeal of New Labour.
Alas, it is just up Gordon Brown's street. It raises £3bn-4bn every year, it is a stealth tax on your pension and it tends to fall more heavily on Conservative voters. And it is a dream to collect. In 2005-06 the Treasury raised £3.4bn in stamp duty from electronic share trades at a cost of just 3p for every £100 raised. It costs £1.42p or nearly 50 times as much to collect the equivalent amount of income tax.
Scrapping stamp duty: an £80bn boost to shares
But that's no excuse for maintaining a tax that puts Britain at a competitive disadvantage. UK stamp duty on purchases of shares is 0.5%. This is by far the highest in modern economies. Germany, the Netherlands and Luxembourg have abolished the tax. France has a rate of 0.13% while the US takes 0.0003%. Moreover, research from centre-right think tank, the Bow Group, suggests that cutting stamp duty could add up to £80bn to share values.
This drew a curt response from Gordon Brown's Treasury: "Anyone who wants to abolish this tax needs to explain how they will plug the £4bn gap in public finances and pay for the vital services it funds". Well, the TaxPayers' Alliance has a few suggestions. The Government spends over £12bn a year regulating our lives and business activities, much of it through the DTI, which has a passion for gold-plating Brussels directives. For example, three years ago the EU issued a modernisation directive, warmly taken up by the DTI. The Operating and Financial Review section in the EU directive was barely one page long and yet the DTI's consultative document ran to 88 pages! Abolishing the DTI would save £5bn and relieve companies of unwanted intrusion in business life. Just think about it. The abolition of stamp duty in conjunction with the scrapping of the DTI could boost share values by more than £80bn.
And just in case the Conservatives get cold feet about the association of tax cuts with cuts in public spending, it needs to reflect on another finding of last year's ICM survey. When asked: "Do you agree or disagree that if the Government reformed public services and cut waste it could make services better and cut waste at the same time?" Only 27% disagreed and 69% agreed. The implication is that the public is no longer taken in by New Labour's mantra that tax cuts automatically mean cuts in vital services, and abolishing stamp duty would at last give us a good reason to vote Conservative.
Brian Durrant is investment director of The Fleet Street Letter
Brian has contributed to MoneyWeek with his expertise in investment strategy, for example how to quadruple your dividend income and how to navigate through the stock market in the 2008 financial crisis. He’s also touched on personal finance such as the housing market and the UK economy.
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