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Raising the cost of energy to British business is nothing less than an anti-growth strategy.

I tried to merge national insurance and income tax in the 1980s. But it is too tricky and too many will lose out

George Osborne’s second Budget got the big things right. In particular, he firmly committed himself to sticking to Plan A: the pledge in his first Budget to eliminate the so-called structural budget deficit within the lifetime of this Parliament.

The structural deficit is that part of the deficit — the greater part — that is down not to the recession, but to gross mismanagement by the previous Labour Government, and in particular by Gordon Brown. It is both the largest it has been in our postwar history and, as the highly-respected Institute for Fiscal Studies points out, the largest in the entire industrialised world (with the possible exception of Ireland).

Labour and assorted fainthearts have been calling for Plan B: a slower, gentler and longer route back to fiscal health. This would be a terrible mistake, and the Chancellor has quite rightly rejected it. In my judgment, he is, as it is, doing the very least that is needed economically, although he may be right that it is probably the most that is possible politically.

It is true that recovery to date has been modest, and progress over the rest of this year is likely to be slow and bumpy. It is true, too, that the Government is likely to become increasingly unpopular as the necessary spending cuts start to take effect and some public sector unions do their best to increase public suffering. The Chancellor and his colleagues will have to stand firm and hang tough. The good news is that the global economy is now firmly in recovery mode, despite the appalling disaster in Japan, and the British economy is swimming with the same tide.

There is no way governments can fine-tune the economic cycle, and it is high time that the short-termist obsession with seeking to do so is consigned to the dustbin of history. The need, as Mr Osborne recognises, is to base decisions firmly on what is right for the medium and longer term. This means eliminating the structural deficit within the time frame he has set out and improving the performance of the economy overall.

And as the UK’s overall economic performance depends pre-eminently not on government but on the enterprise and industry of its people, this means cutting back a bloated state sector to give scope for private business and industry to succeed, eliminating unnecessary regulations and simplifying the burden of taxation.

Moreover, the scope for cutting tax at present is almost non-existent. Almost, but perhaps not quite. I was pleased that Mr Osborne committed himself to bringing the 50 per cent top rate of income tax introduced by the previous Government in its dying days — a particularly damaging impost as most of our leading competitors now have significantly lower top rates — back to 40 per cent, and has asked the tax authorities to investigate how much extra revenue, if any, it has raised. He would do well to ask them to look also at what happened when I reduced the top rate from 60 per cent to 40 per cent in 1988. Not only did this raise more revenue, but at the end of the day the rich were contributing a larger share of total tax revenues than at any time since we took office.

On tax reform, I was deeply concerned at pre-Budget reports that his centrepiece would be to merge national insurance contributions and income tax. This superficially attractive reform, which is by no means a new idea, was known in the Treasury in my time as NICIT. I had, indeed, planned a major move towards NICIT in my 1988 Budget, and instituted in 1987 the most thorough study by Treasury and Inland Revenue officials there had been (it had been looked at, less thoroughly, in 1982).

As the study developed, it became increasingly clear that what looked at first sight so elegant and logical was in practice a huge elephant trap, and in January 1988 I aborted the project.

So I say to George: “Don’t go there”. In fact, I suspect he is already backtracking. His Budget speech was reassuringly careful, ruling out the application of national insurance contributions (unlike income tax) to pensions or savings income and (although describing it as a “historic step”) seeming to commit himself to little more than tidying up administration of the two systems, which may be very sensible but is scarcely “historic”. The problems in a merger are many, quite apart from the pensions point — among them that numerous allowances and reliefs apply to income tax, which do not apply to national insurance contributions.

A merger of the two would, in practice, be very costly and (because there would be both winners and losers) highly unpopular, all to little advantage. None of the officials who worked on the 1987 study are there now. But the Chancellor would do well to dust down the NICIT dossier (and also the associated upper earnings limit dossier), and to read, mark, learn and inwardly digest it. I do not want to see him fall into the elephant trap.

However, one trap he has, albeit only half-heartedly, fallen into is the green trap. Once again, although superficially attractive, this has the capacity seriously to undermine his pro-growth strategy. Raising the cost of energy to British business — of which the latest example was his announcement that “today we become the first country in the world to introduce a carbon price floor for the power sector” — is nothing less than an anti-growth strategy.

At the very least this, and all anti-carbon measures that the Government is embracing, should be put into suspense until a binding global decarbonisation agreement has been concluded, for two compelling reasons.

First, unilateral UK action, in the absence of a global agreement, is futile in climate terms. And second, the only effect is to put British industry, in particular manufacturing, at an increasing competitive disadvantage.

But, overall, this week’s Budget confirmed, in my judgment, that economic policy is firmly on the right lines. The financial markets believe so, and the fair-minded British people will pass their verdict in four years’ time. Our democracy allows a government to do what it believes to be right, and a reasonable time in which to do it before the people pass their verdict.

As events in the Arab world remind us, the essence of democracy is the ability of the people to eject peacefully, at regular, reasonably frequent intervals, a government in which they have no confidence. In this country we have an electoral system that does this better than any conceivable alternative — which is an overwhelming reason for not changing it.

Lord Lawson of Blaby was Chancellor of the Exchequer 1983-89. He is the Chairman of the Global Warming Policy Foundation.

The Times, 26 March 2011