Vince Cable demonstrates his economic illiteracy

Posted on 22 September 2009 by Ray Boulger

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Liberal Democrat Shadow Chancellor Vince Cable opened his speech at the party conference yesterday by saying "If there were ever a time for the Liberal Democrats, this is it." On that basis I presume he doesn’t expect the LibDems to ever form a Government.

He correctly identified that the next General Election will be fought over the economy and then predictably tried to rubbish the two main parties’ credentials in this area. After speaking of the “enormous economic challenges” facing the country he said: “One (option) is to trust the people who led us in to the present mess to get us out of it: but this would be a triumph of hope over experience.” It is hard to disagree with that statement.

But his criticism of the Conservatives was that their “life time experience of business is confined to managing their Bullingdon Club bar accounts.” He claimed that LibDems, on the other hand, were better able to sort out the economy because “These are big jobs for people who’ve been tested in the real world of work.” This presumably wasn’t meant to be a joke but it is hard to think of many LibDems who have “been tested in the real world of work”, notwithstanding the fact that Vince did have a proper job before becoming an MP, and I am not referring to his ballroom dancing!

The two announcements which have grabbed most of the headlines are to impose a so called Mansion Tax on owners of properties worth more than £1m and to increase the earnings threshold before income tax becomes payable to £10,000.

Cable said “It is wrong that people on the minimum wage should be dragged into tax.” The minimum wage for employees over the age of 22 increases to £5.80 per hour in 9 days time and so assuming someone on minimum wage works a 40 hour week and gets holiday pay they would earn £12,064 p.a. In fact anyone working at least 33½ hours a week would earn over £10,000 p.a. For someone who is meant to be an economist Mr Cable’s command of basic arithmetic appears to be somewhat lacking.

Now for the Mansion Tax. The proposal is to impose a tax of 0.5% p.a. “on property values over £1m.” This is being interpreted as a tax on residential property but what Mr Cable actually said implies commercial property would also be included. If that is not the intention he is guilty of very sloppy wording in a speech which was no doubt pored over by several people before the final version was agreed.

As the LibDems have no chance of winning an election any time soon they can indulge themselves in the luxury of announcing policies without having bothered to think through all the implications. A cost benefit analysis would be a basic step. What percentage of the cash raised would be wasted in extra bureaucracy? I suspect it would be disproportionately large, just like the London congestion charge, where road works appear to be a far bigger cause of congestion than vehicles.

Until recently the LibDems wanted to abolish Council Tax and replace it with a local income tax. Now they want to introduce a tax which is in essence an extension of Council Tax. It reminds me of the old Schedule A property tax, which was abolished many years ago because it was a bad tax.

Vince Cable has not stated how valuations would be obtained or how he would deal with fluctuating property prices. We know from problems with mortgage valuations that automated valuations can sometimes be way out – we have had examples where the real value established by a physical valuation has been 50% more than an automated valuation.

Nick Clegg claimed it would be “relatively easy” to establish value using Land Registry documents. How naive! Using the Land Registry figures for properties which last changed hands several years ago would be prone to significant error. Furthermore it has been pointed out that such a tax would come under the devolved powers of the Scottish Parliament and the Welsh Assembly and hence either or both could refuse to implement this new tax. More egg on face as it appears Mr Cable has overlooked this minor legislative impediment.

The only positive thing I can say about this tax is that at least the proposal is to apply it to the amount of the property value in excess of £1m, not to the total value of properties worth more than £1m. In that respect it is much fairer than the tiered system of stamp duty land tax Gordon Brown has imposed on us.

The new Government will have to increase tax revenue after the election as it is impossible to believe the budget deficit can be contained solely by spending cuts, despite the huge scope to cut waste in Government expenditure. Vince Cable has not properly thought through this proposal but if property taxes are increased in such a way as to generate revenue on an annual basis the obvious way to do it would be to increase the number of Council Tax bands. One can argue about whether council tax is a fair tax but as long as we have it I think there is a case for adding a couple more bands at the top end. After the initial cost of new valuations the additional cost of collection would be nil.

Stamp duty land tax is also in desperate need of reform to remove the unfairness and no go areas for property prices a little above the current thresholds. Such a reform could combine a fairer system, less tax on most cheaper properties but higher tax for properties above, say, £1m. A fairer tax could be something along these lines:

0 - £150,000:                             Nil

£150,001 – £300,000                  2.5% on the amount in excess over £150,000.

£300,001 - £500,000:                  5% on the amount in excess over £300,000.

£500,001 upwards                      6% on the amount in excess over £500,000.

These percentages may not raise the amount needed but the principle is one which an incoming Conservative Government should adopt. Using the above percentages the amount of tax payable compared with the current system would be:

Total tax payable at £250,000 would be £2,500, the same as at present but it would be less for amounts between £175,000 and £250,000.

Total tax payable at £300,000 would be £3,750, compared to £9,000 at present.

Total tax payable at £500,000 would be £13,750, compared to £15,000 at present.

Total tax payable at £750,000 would be £28,750, compared to £30,000 at present.

Total tax payable at £1m would be £43,750, compared to £40,000 at present.

Total tax payable at £2m would be £103,750, compared to £80,000 at present.

Total tax payable at £5m would be £283,750, compared to £200,000 at present.

Total tax payable at £10m would be £583,750, compared to £400,000 at present.

Many properties purchased for sums in excess of £2m are commercial and hence implementing a change along these lines would not only make the tax fairer but would in effect also transfer some of the burden from the householder to business.

Categories: Property market, House and home

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