Response to the Emergency Budget

The ASI’s emergency budget response welcomes the fiscal consolidation proposed by the government and praises the changes to the personal allowance and corporation tax, while also pointing out that the Chancellor could have gone further on spending cuts, and should not have raised VAT and Capital Gains Tax. It goes on to argue that cuts should be achieved by fundamentally re-thinking the role of the state rather than salami slicing, and advocates radical welfare reform as an urgent priority.

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Estimated revenue losses from CGT increases

International evidence suggests clearly that increases in capital gains taxes above a very modest level result in decreases in revenue. Similarly, if capital gains tax rates are set above a relatively modest level, then their reduction will involve an increase in revenues. This paper uses new evidence from Ireland, Sweden and Switzerland combined with existing analysis from America, Australia and Britain to try and identify more precisely the revenue consequences of CGT increases in the UK. It looks at both revenue losses from capital gains tax and from other taxes.

Read this report.

The Party is Over

In The Party is Over – A Blueprint for Fiscal Stability, city economist Nigel Hawkins argues that reducing public spending is the most pressing challenge the new government. His report goes on to point out that – assuming the Treasury's growth forecasts are correct – the government will need to cut spending by 3 percent a year to balance the books by 2015. That means finding more than £90bn of cuts over the course of the current parliament. Hawkins also argues that no area of public spending - even the NHS - should be ring-fenced.

 

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Re-Booting Government

In 'Re-Booting Government: How to deal with the deficit without cutting vital services', Dr Eamonn Butler argues that reducing deficits and debt is essential. Debt imposes a large interest-payments tax on citizens, limits the options open to governments, and it weakens political leaders both at home and abroad. But in the long run, a cheese-slicer approach to cutting spending is not going to be enough. We need to completely rethink the role of the state, what it does, and how it does it. In short, we need to reboot government.

Read this report.

The Effect of Capital Gains Tax Rises on Revenues

This report reviews international evidence on the effect of capital gains tax rises on government revenues, finding that tax rises tend to decrease revenues while tax cuts tend to increase them. It suggests that aligning CGT rates with income tax, as the UK government has proposed, would significantly hit revenues and worsen the deficit, as well as discouraging much needed investment. It also refutes the idea that CGT is primarily a tax on the rich, suggesting instead that CGT hikes will hit ordinary families and – in particular – retirees. Finally, the report describes the idea that people can easily shift income to capital gains and thus avoid taxes as a theory in search of some evidence, pointing to numerous countries with high income taxes and low capital gains taxes where this does not seem to be problem.

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Treasury forecasts: the tendencies and consequences of inaccuracy

In this study, Liam Ward-Proud analyses the accuracy of Treasury budget forecasts for GDP growth by comparing them with the ensuing growth. Examining three different types of forecast, some key trends are found in relation to the correlation, absolute errors and a bias towards overestimation in the sampled forecasts. The consequences for fiscal planning are then spelled out and a solution for mitigating the damage of inaccurate forecasting is put forward.

 

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Why Britain needs an Economic Responsibility Act

This briefing calls on the next government to pass an Economic Responsibility Act, which would place legally binding restraints on government’s fiscal policies. Specifically, it would: (1) cap government spending at one-third of GDP; (2) cap the budget deficit at 3% of GDP; (3) cap the national debt at 40% of GDP; (4) require that off-balance-sheet obligations were fully calculated and openly stated; and (5) allow government to borrow only to invest in capital projects, not to fund current expenditure. This briefing also recommends that new rules be introduced to limit government’s ability to raise taxes.

 

An international development policy that works

In 'An international development policy that works: Why the Conservative Party should rethink its commitment to development aid' Sam Bowman argues that the UK Conservatives have failed to propose the radical policy overhaul needed to make the Department for International Development (DFID) an effective body. He suggests scrapping the pledge to spend 0.7% of national GDP on international development aid each year, and focusing instead on private donations, economic migration and unilateral tariff reduction.

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The Lesson of a Levy on Banks

According to this briefing paper from Miles Saltiel, proposals to introduce a new ‘bank levy’ would do little to correct the problems in the banking sector, and act as a distraction from other, more pressing reforms. Politicians ought to reject populist calls for new taxes and punitive regulation and instead focus on a few key issues: breaking up the nationalized banks; ensuring greater transparency and more honest accounting; requiring tougher capital and liquidity ratios; mandating living wills so banks can be run down in an orderly fashion; and moving derivative contracts onto regulated exchanges.

 

[gview file="http://www.adamsmith.org/sites/default/files/resources/a-levy-on-banks.pdf"]

The Broken University

In The Broken University, education expert James Stanfield examines what is seen and what is not seen in the UK higher education sector. In contrast to the conventional wisdom, he finds no compelling evidence to suggest that public subsidies to higher education have any economic benefit. Moreover, Stanfield convincingly argues that once its hidden costs and unintended consequences are taken into account, government intervention in higher education is doing far more harm than good, and is holding back the development of one of the UK’s most important service sectors.

 

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