Even Labour’s good ideas are doomed to fail

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We are well into the season of Budget speculation, spiced up by various leaks. Two ideas have surfaced which, to my mind, have some merit, and yet, in the Chancellor’s hands, will probably fail.

The first concerns National Insurance (NI).

Politicians and Treasury officials have long toyed with the idea of merging NI and income tax, thereby simplifying the tax system and reducing administrative burdens on both companies and HMRC. In the end, they have baulked at the idea.

The main drawback has been that NI is not payable on pensions, rents or investment income.

So if you simply folded NI into the tax system, it would imply a significant increase in the effective tax rate on pensions, rents and investment income, sparking outrage from those affected.

Moreover, there was the lingering influence of the contribution principle.

Many people still think that their entitlement to use the NHS and draw all the various benefits of the welfare state derives from the fact that they have paid in money via their NI contributions.

In the vernacular, people say: “They have always paid their stamp.” In practice, although there is an NI fund in the Treasury’s books, it has long been a mere accounting entry.

NI has become a tax by another name. Whether the NI Fund is in surplus or deficit has no bearing on money allocated to the NHS or various state benefits.

But there is a sense in which NI remains distinctly different from tax.

Your NI contribution record is a determinant of how much of a state pension you can draw. Accordingly, amalgamating NI with the tax system would require establishing a new basis for entitlement to the state pension. But this should not be beyond the wit of man.

It is rumoured that the Treasury is considering an interesting wheeze involving NI at the coming Budget.

The idea is to put up all rates of income tax by 2pc and offset this with a 2pc reduction in employees’ NI contributions. The beauty is that, because NI is not levied on pensions, rents and investment income, this would be a net revenue raiser of about £6bn per annum.

Far from being worried about hitting pensioners, landlords and the recipients of investment income, this Government relishes the thought. Taxes would rise on this group but not on “ordinary working people”.

I have long found the idea of putting NI and income tax together attractive.

In fact, for a Government aiming to reduce taxes, I would advise laying out a forward plan that involves a gradual reduction in employee NI rates, without touching income tax rates, until employee NI is abolished.

This would have eventually resulted in the effective tax rate (combining NI and income tax) for pensioners, landlords, and recipients of investment income being the same as for “ordinary working people”.

But in Labour’s hands, wanting to raise revenue and wanting, doubtless, to clobber the so-called “undeserving classes”, the equalisation is set to go in the opposite direction.

If they succeed this time, I expect repeat episodes in the coming budgets. If they have long enough, this could end up abolishing employees’ NI contributions, but with the exact opposite effect to what I want.

The second idea that has been floated is a pay-per-mile tax on electric vehicles. I have long been in favour of a system of road pricing under which all road vehicles are taxed according to the number of miles driven and, in the sophisticated version, when and where they are driven.

But I have never favoured this as a revenue raiser. Indeed, I have suggested that a full-fat system of road pricing should involve the elimination of other forms of taxes on motorists, including vehicle excise duty.

The idea would be to incentivise motorists to use their vehicles in a way that is consistent with the limited road space available.

Such a system is employed very successfully in a number of countries. It would represent bringing the ordinary forces of supply and demand into a significant part of people’s lives – and an important part of the economy – that is blighted by the collision between scarcity (limited road space) and low, fixed marginal costs.

But what we seem to be set for is a charge that applies to electric vehicles only, at a flat rate regardless of where and when the vehicle is used, and is due to be payable in addition to other road taxes.

Ironically, this possible move is being driven by the increasing number of electric vehicles, which are leading to a fall in revenue from fuel duty on petrol and diesel.

The result would be no nuanced encouragement to align road use with road availability and to account for the effects of congestion on others.

And since the charge would apply only to electric vehicles, it would make EVs less attractive. It would just be another tax grab, as the opponents of road pricing have always argued it would be.

Edmund King, the President of the AA, who has supported a sophisticated, revenue-neutral version of road pricing, has labelled this idea a “poll tax on wheels”.

His words could be prophetic. It is striking that a Labour Government that refuses to cut public spending and therefore needs to raise vast sums of money can easily turn good ideas into bad.

Roger Bootle is senior independent adviser to Capital Economics and a senior fellow at Policy Exchange. roger.bootle@capitaleconomics.com

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