Darling’s budget has introduced tax hypothecation
As MPs rush through the Finance Bill before the general election terminates parliament they might spot that Britain has introduced hypothecation – specific taxes raised to fund specific causes.
Despite calls for hypothecation – Robin Hood taxes on banks to alleviate poverty, for example – we do not have it Britain. Or we did not until Alistair Darling’s March budget. The Labour chancellor has cleverly linked several of his spending plans to individual income streams, however.
The £2.5bn growth package that Darling highlighted will, for instance, be financed partly from the £2bn yield provided by the tax on bankers’ bonuses, he said. That tax on bankers will also finance the extra university places, additional apprenticeships and other ways of keeping youths off the dole.
And by freezing inheritance tax thresholds for four years, the chancellor added, he can fund long-term care for the elderly.
So the rich finance the old and the bankers finance the young. That should secure votes from two key components of the electorate.
But there are other examples of taxes being directed to specific causes, such as the ridiculous monthly levy on landline phones to finance rural broadband. And the increased stamp duty on homes over £1m to allow first-time buyers to avoid the tax on properties under £250,000.
Darling related those taxes directly to that spending. And he has other self-financing schemes, such as the £2,000 car scrappage subsidy where the manufacturers paid half and the Vat from the 30 per cent boost to sales more than offset the Treasury’s half.
And as with the cars, Darling has proved adept at making the private sector pay for his public hand-outs. The budget described how half the £2bn cost of his new green bank will come from asset sales, including the Channel Tunnel rail link, with private investors providing the other half. So that’s a new bank with no cash cost.
Then there’s the Growth Capital Fund outlined in the Finance Bill: banks are providing half its £200m set-up cost – effectively another tax on banks, given they daren’t so no to this voluntary contribution.
And now the OFT is levying serious fines for competition abuse by companies including Royal Bank of Scotland and British Airways, it joins the Financial Services Authority and Ofcom in having a source of revenue to pay for its regulation.
So hypothecation can crept into UK public finances. It is not a good thing, however. Bashing bankers or the wealthy may please the electorate, but linking spending to taxes distorts decision-making. Who will pay for the students when the bank-bonus tax ends? If the Channel rail link realises more than expected, will the surplus have to go into the green bank too?
Hypothecation is all about courting popularity rather than sensible spending. But as MPs rush through the Finance Bill at a record rate, will any have time to mention how Darling has rewritten the rules?
