Brian Monteith: Osborne must forget Lib Dems and cut tax

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As the March budget fast approaches the Chancellor is having to face up to problems he thought he had avoided. Here’s a wee list in case you need reminding:

Unemployment was always expected to climb, but will get worse because the stalled private sector recovery is not making up for the public sector jobs being shed.

Economic growth is faltering and the predictions have all had to be marked down – partly because our export-led economy has seen sales in the eurozone collapse.

The majority of the public sector cuts are not in fact due until the new financial year – so the economic drag this will cause (lower consumer spending, less tax revenue, higher benefit payments) can only get worse.

Then to cap it all there was the warning that the UK’s triple-A rating has been put in doubt – with a one in three chance of it being marked down. The contagion from the Euro crisis that might hit British banks exposed by their lending to French banks (among others) together with the poor government tax revenues that make borrowing necessary was the kick in the teeth the Chancellor did not need.

The whole point of Osborne’s so-called austerity measures was that it would preserve the triple-A rating and thus keep borrowing costs low (for the government and in turn, us). The trouble is, as I have written many times before, the Chancellor’s economic policy has always been lopsided; it always relied too much on cutting spending and not enough on encouraging growth. The Chancellor needs tax cuts and he needs them badly – but how can he afford them when he says he is already cutting spending to the bone?

I have no doubt that there is much more that could be done to trim public spending, not least all those barmy jobs that we read of on a daily basis that always seem to be the last to go – while we become short of teachers, nurses and the like. You know the type I mean, the “real nappy advisers”, the “walking and cycling officers” and the “five-a-day counsellors” (that’s vegetables and fruit – not fags or sex).

The public sector seems to guard these jobs with a vengeance. Everybody seems scared to call them out as a waste of money for fear of being pilloried by Polly Toynbee in the Guardian, some false (government-funded) charity or Janet Street Porter on telly.

The hard fact is that the public sector will always be overweight and, like those trendy diets where you end up even fatter after some initial weight loss, the cuts never seem to stick.

No, the real answer is for the Chancellor to admit that he made a mistake and that he needs to find those special tax cuts that pay for themselves. Here’s how it works.

When Presidents Coolidge, Kennedy and Reagan cut the top rate of tax in the United States the wealthiest people ended up paying more tax. When Chancellor Nigel Lawson cut the top rates of British tax the wealthiest people ended up paying more tax.

Strange but true. Why? It’s because wealthy people then put their money to good use to earn more, it’s because they worked harder instead of resting on their backsides (as it had become a good time to be earning money) and because it no longer paid to find legitimate but expensive ways to avoid tax.

A tax cut in the higher rate from 63 to 40 per cent meant the Chancellor risked losing revenue from rich taxpayers, but many of those were not paying at all. So, 40 per cent of something from many wealthy people was better than 63 per cent from a few. Tax revenues climbed, jobs were created and the US and UK economies grew.

What’s stopping the Chancellor from cutting that stupid 55p top rate of tax that could help the economy recover? Why, the green-eyed Lib Dems who want to keep the high top rate and bring in a daft mansion tax that would do for big houses what Lloyd George’s death duties did for so many stately homes – turn them to rubble.

Now my friend the serial Scottish entrepreneur Robert Kilgour has come up with a better idea, cut the VAT rate on refurbishing health care properties from 20 per cent to five per cent.

His point is simple, there are many care homes (like the ones he runs), dental practices and community clinics that would like to refurbish their properties but such is the cost of the work the high VAT rate prevents projects going ahead. Drop the VAT rate and fresh building work will start.

In other words the government would earn five per cent of something happening instead of 20 per cent of nothing happening.

These are the types of schemes that Osborne has to find, schemes that unlock private capital investment and create jobs. It can be done – but has he the bottle to upset those real nappy, five a day, walking and cycling Lib Dems?