WHEN George Osborne makes his second budget statement as chancellor of the exchequer on March 23rd (see article), he seems set to outline a grand “growth strategy” to counter claims that he is more interested in cutting spending than boosting the economy. But the budget is meant to be about tax—on which, for all its radicalism elsewhere, the government has been timid. Mr Osborne should rectify that.

On the face of it, this is not an ideal time for radical change. Altering the tax system is hard enough when there is spare cash to act as a lubricant. There isn't: although public finances are a bit less dire than Mr Osborne feared when he fashioned his first budget last June, Britain's deficit this financial year will be equivalent to around 10% of GDP. But the scarcity of revenue, though unhelpful, is also a reason for action. An inefficient tax system is a luxury the country might have been able to afford when the economy and tax receipts were healthier. It no longer can. And because reform is politically fraught, and its benefits take time to emerge, a budget in the first year of a parliament offers the best chance to make lasting changes.

First principles

Mr Osborne should set out a strategy for taxes to complement last autumn's bold public-spending plans. A review published in November by the Institute for Fiscal Studies, a think-tank, and headed by Sir James Mirrlees, a Nobel prize-winning tax theorist, sets out some principles that he would be wise to adopt. A good tax system has three main elements: it should be progressive (ie, place a greater burden on the better off); it should not bias choices over how much to work or (with a few exceptions) what to consume; and it should be simple.

The British tax structure, with its thousand-odd reliefs and numerous tax rates, is woefully inefficient. Its complexity imposes costs on business, blunts work incentives and diverts energy from creating wealth to shielding it from tax. The Office of Tax Simplification, a body set up by Mr Osborne last year, has identified 47 tax reliefs that could be easily abolished. But more radical changes are needed to create a system that raises the necessary revenues while doing the least economic harm. The taxation of both savings and property is incoherent and needs rethinking. But having made a modest start in June by cutting the main corporate-tax rate, Mr Osborne should now concentrate his efforts on simplifying personal taxes and broadening the base for VAT.

An ideal system of personal taxation would have a tax-free allowance (so the low-waged pay little or no tax), two or three rates, and a broad base including non-wage income. The current arrangements are far too complex. One absurd kink has been created by the withdrawal of tax-free allowances once income passes £100,000 ($160,000), leaving a marginal rate of 60% between the middle and top rates of income tax (which kicks in at £150,001). Alongside income tax is a schedule of national-insurance contributions (NICs), ostensibly a social-insurance levy but in reality an auxiliary wage tax. The two systems are poorly aligned. They should be merged, with the part of NICS paid by employers left as a stand-alone payroll tax.

A single personal-tax schedule with a broad base could ensure the tax system is progressive, which would allow for a complementary broadening of VAT. Only around half of consumer spending is taxed at the standard VAT rate of 20%, a low share compared with other rich countries. Britain's consumers do not pay VAT on most foods, public transport, children's clothes, banking, books and newspapers. Domestic energy bills attract a 5% rate. Some categories of spending such as food are sheltered from tax to help the poor. But exemptions from VAT distort choices by, in effect, subsidising some consumers over others. They should be scrapped. The revenues raised could be used to compensate those on lower incomes through increased state benefits, a higher tax allowance and rate cuts.

These tax changes could be staged over several years to allow some relaxation of the fiscal squeeze, should the economy falter. Fixing some of the glaring irrationalities in the tax system would have as big an impact on medium-term growth prospects as anything else Mr Osborne is likely to announce in his budget. He should take his chance.