Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.
The Treasury is at the front line of the leadership battle, with each candidate accusing it of orthodoxies and promising a new economic approach.
In my last column, I highlighted the problems with Treasury decision-making, based on my experience of working with it for over 20 years. In short, the fundamental issue for the Treasury is that it is both finance ministry and economics ministry, responsible both for raising taxes and for promoting economic growth. Its responsibility to fill the national coffers always wins out – and economic growth pays the price.
As chair of the 1922 Treasury Committee, I have spent the last few months working with colleagues forensically examining the tax system, and everywhere you look it is a real mess: over-complex, perverse, riddled with unintended consequences, both over-burdensome and full of unjustified exemptions. There is a consensus that we need simpler, flatter taxes, and yet that goal has eluded successive governments. What should be done?
The first is that Number 10 has to make Treasury reform a priority. The new Prime Minister needs to appoint a Chancellor and ministerial team able to deliver reform, and to have monthly meetings to ensure reform is progressing and hold them to account. Otherwise, it risks running into the sand. One former Treasury minister was shocked to be told by his predecessor that he should just do what his officials tell him, as they are cleverer and understand things better. That needs to end: ministers need to have the wherewithal to challenge officials.
Some former Treasury ministers suggested to me we need to do a quick independent international review. There is a complacent assumption in the Treasury that it is the best in the world, but we clearly have a lot to learn from other countries about how they manage the same challenges. For example, many countries have separate finance and economic ministries, which would essentially involve splitting the Treasury in two.
At the very least, we need an Office for Economic Growth, as proposed by both Kemi Badenoch in her leadership bid and the former Treasury minister, Lord Agnew. This would be independent of the Treasury and answerable to Parliament, and would examine in detail the impact of Treasury policies on economic growth.
Just as the Office for Budget Responsibility does a reasonable job of holding the Treasury to account on budget issues, the OEG would publicly report on how changes to taxation and other reforms impact on economic output. It would report on every Budget, and do its own independent studies.
The Treasury needs to adopt a clear tax strategy, so that officials, minsters and taxpayers know the direction of travel and objectives. Without a longer term strategy, changes to tax will be tactical, over-politicised, and people will have no idea what to expect and how to plan.
George Osborne made clear his long term plan to bring down the rate of Corporation Tax, which he then delivered over successive budgets, but that was just for one tax rather than the taxation system as a whole. The Treasury did recently publish a “tax plan”, but it had little content. A full tax strategy could, for example, state the aim that tax should be neutral on forms of income, and not tax people differently if they earn money from employment, self-employment, dividends or rent.
It could also have as an objective the good Conservative principle that everyone should keep most of the produce of their labour, with no one taxed at a marginal rate of over 50 per cent. At present, people on universal credit, higher earners getting child benefit, and those earning above £100,000 losing their personal allowance all face marginal rates of over 50 per cent. This has to end, andwill be easier to do if it is a clear objective of tax policy.
Once you have a longer-term strategy, a whole series of reforms follow. For the last 30 years, successive Chancellors have wanted to merge National Insurance and income tax – the division between the two has no economic or political justification, and creates huge complexity, lack of transparency, burdens on business, and unintended consequences.
The row over IR35, which has so heavily hit self-employed workers, is because of the discrepancies between NI and income tax – a completely Treasury-created problem. It means we now have four different taxes on income – as well as income tax, we have employees’ national insurance, employers’ national insurance and the new health and social care levy.
All four income taxes don’t just have different rates, but are calculated in different ways over different time periods, on different income, with different allowances and different exemptions. Everyone agrees this is incredibly damaging and inefficient. But the challenges of merging the different taxes on income are so great, and create so many losers, that successive Chancellors have always given up.
But a clear strategy to converge the taxes over time would gain public and political acceptance of the gradual reforms necessary, and stop changes that pull in the opposite direction. For example, the new Health and Social Care Levy clearly exacerbates the distortions between NI and income tax, and would not have been introduced if the government had a strategy to converge the taxes. The Office of Tax Simplification has produced a useful report on how to take steps to merge NI and income taxes, with many implementable reforms, but it has been ignored.
The Treasury Green Book, which sets out the principles of public spending, is another long term bone of contention. There absolutely needs to be strong guidance on how to decide what projects to spend taxpayers’ money on, to stop the building of white elephants. The Green Book has been reviewed in the past, but it takes a very narrow view of spending which often makes the Treasury take an anti-growth stance.
As I highlighted in my last column, when assessing transport projects, it takes account of changes to passenger behaviour, but does not take into sufficient account the wider economic impact, with the result the Treasury campaigned both against the Jubilee Line extension to the Docklands, and the building of the M25.
It means that the Treasury believes in investing in the parts of the country that are doing well economically, and not those that are not – a strategy that has been compared to only watering the plants that are already growing quickest. It means the Treasury campaigns against tax breaks aimed at helping economically deprived areas. The Treasury is overly obsessed with deadweight costs (the unintended loss of revenue from a tax cut), too rarely takes account of behavioural change that follows tax change, and virtually never considers the interactions between different taxes, or wider economic growth.
So, for example, it has repeatedly increased stamp duty on higher cost properties, considering only the direct amount of money raised, and not that reducing the number of property transactions reduces income from other taxes (eg VAT on building work) and labour mobility. This all needs to change. The Treasury is in need for reform, and can be reformed. But it won’t happen without political determination.