Our economy needs to keep growing – tax cuts are the way to do it

Britain's economy is growing again. Revenues are flowing into the government's coffers, and while the budget deficit remains vast, for now there seems little sign of the bond vigilantes' imposing higher interest rates. With a general election just over a year away, it is no surprise the government is starting to make noises about tax cuts.

On Monday, the chancellor, George Osborne, held out the prospect of an eventual drop in the amount of tax he takes from us every year perhaps not in this parliament, but at least in the next.

When a country is as heavily taxed as Britain is the government collects 39% of GDP in taxes there is inevitably a long list of different taxes begging to be cut, and powerful arguments can be made for each. But the sector that needs the cuts most is business slashing taxes on companies offers the best chance of building on today's modest recovery.

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Given that this is a Tory-led government, there have been remarkably few tax cuts so far. The top rate of tax has been cut from 50% to 45%, personal allowances have been raised sharply, and corporation tax has fallen. But there have also been big increases in stamp duty, particularly at the top end of the market, and more and more people have been dragged into the 40% tax-rate band.

In the 1970s only 3% of taxpayers paid what used to be the top rate of tax. It will hit 12.5% this year, and 15% next year. This government has been as much about tax rises as about cuts.

To an extent, that is understandable. The government inherited an out-of-control budget deficit, and had to convince investors it was not about to turn into another Greece. The Lib Dems in the coalition are by instinct tax-and-spenders, rather than tax-cutters, and their views have had to be taken into account too.

Yet with the economy picking up, and the deficit falling a little, some scope for tax cuts has opened up particularly as the Tories could be in government by themselves, if they are in government at all, after the next election.

But what to cut? Over the last 15 years Britain has become a high-tax country (and still managed to rack up a huge deficit). The main reason people feel poor is because they have to pay for an over-mighty state. So there's plenty of scope for cuts.

As house prices rise, inheritance tax will again become a worry for ever more people. The 40% tax band is also catching far too many workers. The low paid are still struggling to meet the taxes they are forced to pay. Reductions in any of those would be very welcome. But it is business that needs the tax cuts the most. Three moves in particular would make a huge difference to Britain as a whole.

First, cut business rates. High-street retail sales are getting hammered: sales in shops were down 2.2% on the year in December, according to accountancy firm BDO, but they were up 31% online. There is a huge ongoing structural shift in the way we shop.

Perhaps nothing can or should be done to stop that. There is nothing sacred about traditional high streets, after all. But business rates have become punitive for shops that are struggling to stay afloat. They need to be cut so that the tax burden is neutral between online and offline shopping the market can then work out which we prefer. As it stands, the government is just putting a whole industry out of business.

Next, keep cutting corporation tax. The coalition has made a good start, reducing the rate to 23%. But it should go further. Britain can pull decisively ahead of the rest of Europe. Staying out of the euro has allowed our economy to recover far faster than the rest of the continent, and thanks to mass immigration we have a rising population while workforces are shrinking elsewhere.

We are already a more attractive home for foreign investment than most other countries. Throw in far lower corporate taxes and Britain should be able to win the bulk of the factories and offices that might otherwise go to France or Germany.

Finally, a cut in national insurance would keep employers creating jobs. Britain has already done well on that front healthy job creation is one reason why the recession has not hit as hard as it might have. But even more jobs are needed.

The bloated public sector needs to shed more staff, which means the private sector needs to create more vacancies to compensate. And while the jobs that have been created are welcome, too many are badly paid, which is one reason why living standards have been under such pressure.

The only way to fix that is to create even more jobs. Once firms are competing for labour again, they will start paying more. Cutting national insurance is the quickest way to make that happen.

The recovery so far has been welcome, but modest. We are still catching up with the output lost to the recession. If we want a sustained recovery, growth needs to accelerate from here. And tax cuts for business are the best way to do it.