Jonathan Guthrie: Bad Santa brings paltry gifts

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At 3.30pm on Monday, the chancellor stood up to speak. He placed his papers on a couple of tomes. He cleared his throat. Bad Santa was in the house.

Like the safe-cracking Father Christmas of the US comedy film, Gordon Brown gained admittance to the department store of the UK economy on the understanding he would dish out presents to the good and needy. Since then, he has made off every year with a slice of the trading profits secreted in his sack.

This pre-Budget report was no exception. In 1997 Mr Brown raided private pension funds. In 2002 he raised employers’ national insurance contributions. This time he slapped one windfall tax on energy companies, proposed another for land owners, jacked up the costs of small businesses and closed some tax loopholes used by bigger ones. The total cost to business will exceed £5bn between now and March 2009, according to Ernst & Young.

The changes further complicate a muddled UK tax system that would benefit national prosperity most if it were simple and flat. Governments that summarily tax assets that have risen sharply in price create unpredictability and deter investment. Additionally, tax should appear to be fair. Windfall taxes generally fail the test because the victims receive no special relief when times are tough. But the big profits of energy companies have made them a soft target. Raising the North Sea levy from 10 per cent to 20 per cent is easier than increasing fuel taxes and risking another rebellion by truckers.

A windfall tax on development land can be justified more elegantly. The levy should replace the current untidy, time-consuming system of planning gain, under which councils squeeze payments for new infrastructure such as roads and schools from developers. Introducing a substitute tax on development nevertheless seems a self-defeating move for an administration determined to encourage new housing. A tax on all land would be better calculated to encourage landowners to develop their acres. Instead, the chancellor plans to remodel an obstacle to building new homes, even as the government seeks to speed up planning decisions.

The same sense of muddle clings to the chancellor’s U-turn in two acts over small business tax. The abolition of corporation tax on profits below £10,000 in 2002 triggered a stampede by the self-employed to incorporate. The chancellor cut the value of the concession in 2004 and is now removing it altogether. Instead, businesses that are investing, many of which should be recent start-ups, will get higher capital allowances. The net cost to business will be around £530m by 2008-09, according to E&Y.

When contrasted with his presents to the exchequer, the chancellor’s gifts to business look pretty shop-soiled. New laws will spawn real-estate investment trusts, vehicles that will remove an element of double taxation and encourage property investment. But Reits were first seriously mooted in the UK more than a decade ago. Thickets of skyscrapers have sprung up in lightly regulated developing countries while the government has dragged its heels.

Smaller businesses will be disappointed that the chancellor has not improved their access to tax relief on research and development spending. Around 80 per cent of the £1.3bn in credits provided since 2000 has gone to five big companies. Blue-sky research rather than nuts-and-bolts development has been the focus. All Mr Brown offered were technology centres providing support and advice.

The government’s crackdown on red tape is meanwhile becoming increasingly entangled in that very commodity. A new quango called the Local Better Regulation Office was among the counter-intuitive solutions announced on Monday.

Bad Santa’s festive oration has brought little joy to business. Sir Digby Jones, director-general of the CBI, said: “We are very worried the chancellor is raising expenditure through £17bn more in borrowing, when he should be improving public sector efficiency.”

A £50bn increase in company taxation since 1997 has helped finance a spending splurge that has pushed average public sector pay up to £475 a week, compared with £413 for the private sector. Perturbingly, the fruits have included falling productivity, and budgetary crises at some hospital trusts, as well as much-trumpeted service improvements. As the economy slows and the UK slips down international rankings of business locations, company owners and their employees are less and less deserving of the title “private sector workers”. Increasingly, they labour for the public sector: for the civil servant destined to retire on a well-padded pension at 60, the highly paid consultant to government and the health-service worker taking a sickie.

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