If Ken Clarke had known when he delivered the 1996 Budget that it would be the last purely Conservative finance act for nearly two decades to come, he might have made it more thrilling. Instead, the last Tory chancellor who could write a Budget without consulting anyone else delivered a fairly anodyne set of measures. A 1% cut in the basic rate of income tax, to 23%, was the most exciting announcement, along with the usual stuff about clamping down on tax avoidance.
In July, just 19 years on, George Osborne will unveil the first purely Tory Budget since Clarke's. He is expected to outline the welfare spending cuts that the government promised but did not spell out during the campaign. But he should go much further. In his first five years as chancellor, Osborne had to agree things with his Liberal Democrat coalition partners. Nick Clegg's party portrayed themselves as centrists, but on many economic issues they were distinctly left-wing.
It was the Lib Dems who came up with the idea of a mansion tax, insisted on increasing capital gains tax (CGT), and ruled out significant cuts in the top income-tax band. They were far more concerned with using the tax system to redistribute wealth than to raise revenue for public services effectively. Osborne can now shift policy in a far more right-of-centre direction. Here are four good places to start.
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If you look back at Clarke's speech in 1996, the Conservatives were committed to abolishing inheritance tax (IHT) and CGT too (those were the days). It was only the size of the deficit that stopped them from doing it right away. Osborne promised to raise the IHT threshold to £1m back in 2007. There can't be a promise on which any political party has so frequently failed to deliver. Meanwhile, the relentless rise in house prices means that more and more people on relatively modest means arebeing dragged into the IHT net.
There is a perfectly respectable argument for taxing the inherited wealth of the top 5% of people but very little case for imposing it on the 65% who happen to own their own houses. At the very least, the threshold should finally be raised to that £1m mark(and not just through some fiddly"family home" allowance, as is planned). In fact, given how hard it is to raise it, and how quickly house prices rise, perhaps make it £2m.
2. Cut the top rate of income tax
When Alistair Darling increased the top rate of income tax to 50% under the last Labour government, the taxman collected far less money than the Treasury had predicted. When it came down to 45%, the cash coming in actually rose.
Cutting again to 40% can achieve the same trick, which would be handy, considering that income-tax receipts have so far been disappointing, given that the economy has returned to relatively robust growth. While you are at it, take CGT back down to 18% that tax has also been raising less revenue since the rate was hiked, even though there should be a lot of capital gains out there to tax.
3. Simplify the tax code
Whether you think the state shouldbe spending 35% of GDP or 45% roughly the range of views within the UK it surely makes sense to collect that money as efficiently as possible. That means keeping it simple. In that 1996 Budget, Clarke included a promise to rewrite the tax code in plain English.
It didn't happen far from it. Under Gordon Brown, Tolley's Tax Guide more than doubled in size as the system became ever more fiddly. The coalition did very little to reverse that, in part because the Lib Dems were as keen on small tax tweaks as Labour were. Why not commit to halving the size of Tolley's by 2020 by repealing tax breaks that are no longer needed? While you are at it, why not re-write the thing in plain English? It actually wasn't a bad idea.
4. Give real power to the regions
Any deal with the Scottish National Party is likely to include far greater power for Scotland over corporation tax, income tax and national insurance (NI). Ulster is likely to get control over corporation tax to allow it to match the lower rate in the Republic of Ireland.
But why stop there? There is no reason why tax rates have to be the same all over the country. In America they vary dramatically, and it doesn't do much harm. Wales could get its own corporation tax and NI rates. So could the North East, London, the Midlands and the South West. That would allow a lot more experimentation with which rates generate the best balance between raising revenue and promoting growth. It would also encourage new jobs to be spread more evenly across the UK, as low-growth regions slashed taxes.
The Conservative governments of the 1980s were radical on tax policy.They slashed a whole series of rates, and regularly abolished those that were no longer effective. Most of the time, it worked. They shifted the debate on how revenues were raised, set the agenda for a decade to come and reinvigorated the economy. With the first Conservative budget for a very long time, Osborne should try and achieve something similar.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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