Andrew Sentence is a former member of the Bank of England Monetary Policy Committee, the body responsible for setting UK interest rates. He is now Senior Economic Adviser at PwC and his latest book Rediscovering Growth, is part of the Perspectives series.
He spoke to the Prospector on a range of economic subjects, ranging from domestic concerns to macroeconomic policy. The interview will be published here in full over the coming days
Jay Elwes: What do you think of Labour’s plan to introduce a 50p rate of income tax?
Andrew Sentance: If it had been more effective at raising money, when it was introduced for a few years after the financial crisis, I think there might be a stronger argument. It seems for a variety of reasons that it wasn’t very effective at raising money. The worry I would have is that it creates the impression that the UK is not an attractive place for business activity and for various forms of high value-added business which generate high incomes.
While some people might say “well 45/50p if you’re earning a lot of money, what difference does it make?” we have to remember that we are in a very competitive global environment. It’s not just the tax measure itself, it’s the signal it sends and the danger that it is interpreted as part of a broader anti-business package of measures.
We should be looking at other ways of raising extra revenue—not pushing up tax rates but, insofar as we can, broadening the tax base. That’s the direction I’d be looking—towards broader reform of the tax system. If you’re making broader tax reforms then you can find increased revenue by widening the tax base.
I think the bigger challenge for the UK, though, is getting the ratio of public spending in the economy back down to the sorts of levels that we were running at before the crisis. I think there is limited scope for us to make big increases in the percentage of GDP that we can get from taxation at the moment.
JE: So if given the chance, how would you change the tax system in Britain?
AS: Well I would have a series of moves. I would be not looking to make piecemeal measures like changing one small tax rate but to look at the broader structure of the tax system. There are three areas which have not been very well reformed for decades—since the time when Nigel Lawson was Chancellor.
Those three areas are income and employment taxes, expenditure tax including VAT and environmental taxes. The VAT system is very much the same as it was—in structure—in the early 1970s when it was brought in. I would try and shift more of the burden of the taxes onto spending money, on to expenditure, and on to environmental taxes, so that we could keep down the rates of taxation on income and employment.
We have to remember for most people in employment, income tax is not the only tax they pay. They have to pay National Insurance and their employer also pays National Insurance. We need to get to a system which is competitive and economically efficient in terms of income tax and National Insurance together, so the combined effect of those taxes is as favourable as we can make it. That is the biggest challenge for tax reform.
JE: And property taxes—for example the “Mansion Tax”?
AS: I’m not great fan of property taxes for the same reason as the 50p tax rate. Property tax is taxing the process of wealth creation: accumulation of wealth. And so I think you have to be quite careful with property taxes that you’re not sending a signal that we’re going to increase the taxes on the accumulation of wealth. So I would be trying to shift the tax burden, from income and wealth there through to expenditure and on to environmental levies—penalising activities we want to discourage for environmental reasons.
JE: Do you think the tax system as it stands is counter-productive?
AS: It’s the direction of change I’m talking about. We’re in quite a competitive global environment where the activities and the individuals who earn income and generate value added and wealth, will not necessarily locate in the UK if we have a high tax environment. And so we need to be sensitive to that issue. In some ways, the current tax policy has been sensitive to that by trying to bring down the rates of corporate tax. But companies don’t exist in isolation. They employ individuals and it’s the combined impact of the corporate and personal income tax systems that you also have to look at.
JE: What do you think of Ed Miliband’s bank reform proposals?
AS: We have had an awful lot of emphasis on structural change in the banking system. I wouldn’t say that the banking system is perfect, but I do think we need to let the current reforms settle down and allow the banking system to adjust to a post-crisis economic environment. There are measures already being taken to increase competition, which I know Ed Miliband has been talking about— for example making it easier for people to switch bank accounts.
Governments and regulators need to be very careful about intervening in markets to generate specific outcomes. They should obviously be trying to make sure that markets are properly regulated and therefore we don’t get problems arising—from market failures. But we have had an awful lot of focus on the banking system since the financial crisis, trying to get it in a better shape, and my emphasis for the next couple of years would be to let those reforms settle down. Maybe in five years’ time, we could assess whether there is scope for, or the need for, more regulation and more reform. But the case has to be made for that. If we’re not careful we could end up with the banking system being in perpetual state of revolution and change, where people who work in that system and the people who operate it are not in a position to do the job that we really want them to do.
He spoke to the Prospector on a range of economic subjects, ranging from domestic concerns to macroeconomic policy. The interview will be published here in full over the coming days
Jay Elwes: What do you think of Labour’s plan to introduce a 50p rate of income tax?
Andrew Sentance: If it had been more effective at raising money, when it was introduced for a few years after the financial crisis, I think there might be a stronger argument. It seems for a variety of reasons that it wasn’t very effective at raising money. The worry I would have is that it creates the impression that the UK is not an attractive place for business activity and for various forms of high value-added business which generate high incomes.
While some people might say “well 45/50p if you’re earning a lot of money, what difference does it make?” we have to remember that we are in a very competitive global environment. It’s not just the tax measure itself, it’s the signal it sends and the danger that it is interpreted as part of a broader anti-business package of measures.
We should be looking at other ways of raising extra revenue—not pushing up tax rates but, insofar as we can, broadening the tax base. That’s the direction I’d be looking—towards broader reform of the tax system. If you’re making broader tax reforms then you can find increased revenue by widening the tax base.
I think the bigger challenge for the UK, though, is getting the ratio of public spending in the economy back down to the sorts of levels that we were running at before the crisis. I think there is limited scope for us to make big increases in the percentage of GDP that we can get from taxation at the moment.
JE: So if given the chance, how would you change the tax system in Britain?
AS: Well I would have a series of moves. I would be not looking to make piecemeal measures like changing one small tax rate but to look at the broader structure of the tax system. There are three areas which have not been very well reformed for decades—since the time when Nigel Lawson was Chancellor.
Those three areas are income and employment taxes, expenditure tax including VAT and environmental taxes. The VAT system is very much the same as it was—in structure—in the early 1970s when it was brought in. I would try and shift more of the burden of the taxes onto spending money, on to expenditure, and on to environmental taxes, so that we could keep down the rates of taxation on income and employment.
We have to remember for most people in employment, income tax is not the only tax they pay. They have to pay National Insurance and their employer also pays National Insurance. We need to get to a system which is competitive and economically efficient in terms of income tax and National Insurance together, so the combined effect of those taxes is as favourable as we can make it. That is the biggest challenge for tax reform.
JE: And property taxes—for example the “Mansion Tax”?
AS: I’m not great fan of property taxes for the same reason as the 50p tax rate. Property tax is taxing the process of wealth creation: accumulation of wealth. And so I think you have to be quite careful with property taxes that you’re not sending a signal that we’re going to increase the taxes on the accumulation of wealth. So I would be trying to shift the tax burden, from income and wealth there through to expenditure and on to environmental levies—penalising activities we want to discourage for environmental reasons.
JE: Do you think the tax system as it stands is counter-productive?
AS: It’s the direction of change I’m talking about. We’re in quite a competitive global environment where the activities and the individuals who earn income and generate value added and wealth, will not necessarily locate in the UK if we have a high tax environment. And so we need to be sensitive to that issue. In some ways, the current tax policy has been sensitive to that by trying to bring down the rates of corporate tax. But companies don’t exist in isolation. They employ individuals and it’s the combined impact of the corporate and personal income tax systems that you also have to look at.
JE: What do you think of Ed Miliband’s bank reform proposals?
AS: We have had an awful lot of emphasis on structural change in the banking system. I wouldn’t say that the banking system is perfect, but I do think we need to let the current reforms settle down and allow the banking system to adjust to a post-crisis economic environment. There are measures already being taken to increase competition, which I know Ed Miliband has been talking about— for example making it easier for people to switch bank accounts.
Governments and regulators need to be very careful about intervening in markets to generate specific outcomes. They should obviously be trying to make sure that markets are properly regulated and therefore we don’t get problems arising—from market failures. But we have had an awful lot of focus on the banking system since the financial crisis, trying to get it in a better shape, and my emphasis for the next couple of years would be to let those reforms settle down. Maybe in five years’ time, we could assess whether there is scope for, or the need for, more regulation and more reform. But the case has to be made for that. If we’re not careful we could end up with the banking system being in perpetual state of revolution and change, where people who work in that system and the people who operate it are not in a position to do the job that we really want them to do.
