THE BLOG

An Ideological Exercise in Shrinking the State? This Is What It Looks Like

17/11/2015 07:48 GMT | Updated 16/11/2016 10:12 GMT

Last year HMRC collected £515billion through the tax system (page 8).

It would have been more but for a number of 'tax expenditures' - a particular type of tax relief which you might think of as a substitute for a subsidy (paragraph 7.3.2). Through them we give away by foregoing income "some £100 billion a year" - according to the (Conservative majority) Public Accounts Committee (page 9).

On 25th of November, George Osborne will publish the results of his Spending Review, designed to cut a further £20billion from public spending by 2019-2020 (table 1.A). His aim - or more accurately his avowed aim - is to "deliver value for money for the taxpayer" (paragraph 1.2).

Value for money is, of course, what good governance in the public sector looks like. It's why HM Treasury has a so-called Green Book entitled "Appraisal and Evaluation in Central Government." The 118 pages of that Green Book are one long argument for the need to understand what we get when we spend public money. There is a need to ensure that "Public funds are spent on activities that provide the greatest benefits to society... in the most efficient way."

No one is pretending that the Spending Review will be easy. The Introductory section to the Spending Review provides that it will "involve difficult decisions" (paragraph 1.3). Not least because it follows on from "£14.3billion from efficiency compared to 2010" achieved in the last Parliament (paragraph 2.6).

But here's the thing.

Why are we taking difficult decisions with spending - but deliberately ignoring easy ones around tax reliefs? Why does "value for money" dictate spending cuts when it is absent from Government thinking about reliefs? Where is the Green Book assessment of the value delivered by that £100billion of tax expenditures?

There isn't one.

Here's what the National Audit Office said in November 2014:

"We found little evidence that HMRC evaluates reliefs to see if their objectives are being met."

(paragraph 17).

And here's the Public Accounts Committee:

"HM Treasury and HM Revenue and Customs (HMRC) do not keep track of those tax reliefs intended to influence behaviour. They do not adequately report to Parliament or the public on whether reliefs are working as intended and what they cost and whether they represent good value for money." (Summary).

And:

"HMRC rarely, if ever, assesses whether a tax relief is an economic, efficient and effective way of meeting its policy objectives." (Paragraph 4).

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Let me try and bring this to life with one example - of the 1,156 reliefs the Office of Tax Simplification says exist.

Entrepreneur's Relief reduces capital gains tax to 10% for entrepreneurs selling their business. It was forecast to cost £0.475billion in 2007-08 but in 2013-14 cost £2.77billion - an increase of more than 500%. But, says the National Audit Office, there was "No detailed analysis carried out to explain the increase" (Figure 6).

What has this £2.77billion of expenditure delivered? HMRC says that "the relief may have formed a genuine incentive for entrepreneurs based on the finding that the average age of beneficiaries had dropped from 59 to 53. The analysis did not explain or justify the link between age and entrepreneurship" (paragraph 2.15).

It's not even clear what the purpose of the relief was in the first place.

Giving evidence to the House of Lords Select Committee on Economic Affairs the Oxford University Centre for Business Taxation pointed out that: "The economic rationale for Entrepreneur's Relief is unclear... an entrepreneur that has already gained the benefit of the relief has a (comparatively) reduced incentive to undertake a new enterprise" (page 124).

***

Let's return to the Spending Review.

George Osborne, in his foreword to the HM Treasury paper ("A country that lives within its means: Spending Review 2015") stresses the need to "eliminate the deficit by 2019-20" to deliver an economy that "offers security for the working people of Britain."

Of course, you could eliminate the deficit by reducing your spending. But you could also eliminate it by raising your income through cutting back on tax giveaways. Indeed it's not an either/or. Anyone whose interest genuinely lay in a balanced budget would take a long hard look at both.

You'd look at how much fat there was on the spending side, for sure. You'd recognise that £14billion had already been trimmed - and you'd ask yourself whether more could be done.

But you'd also look at the £100billion cost of those tax giveaways and what public benefit they delivered.

Osborne's doing the former. But he's closing his eyes to the latter. There's compelling evidence waste on the tax side of the Government's P&L but Osborne, quite literally, does not want to know.

This is not where you get to if you're trying to "eliminate the deficit". It's not the way to delivery "security for working people". It's not what you do if you have a genuine focus on "the best value for money for taxpayers".

But an ideological exercise in shrinking the State? It looks like this.