Taxing times – preparing for a post-election tax reckoning

Taxing times – preparing for a post-election reckoning

The Chancellor’s Spring Budget was characterised by a search for personal tax cuts to sway voters ahead of this year’s election. But in taking another 2p off the rate of National Insurance paid by employees (on top of the 2p cut announced in November), and leaving only £9 billion of headroom against his fiscal target for debt to start falling in five years’ time, the Chancellor left public service budgets squeezed and public investment falling. The fiscal inheritance for a likely Labour Chancellor looks very challenging. There is every chance they will be looking to raise tax revenues for public services and to invest more.

From fiscal fiction to painful reality

Many commentators have noted that the Chancellor’s Budget rests on more than one ‘fiscal fiction’, including the idea that fuel duty will rise in future when no Chancellor has raised it for 13 years, and that public services – already under huge pressure today – can cope with only 1% real terms growth in budgets over the next Parliament (implying potentially significant real terms cuts for unprotected budgets like the police, courts, and local government). When will those unrealistic assumptions give way and reality start to bite? And what will that mean for the tax policies that directly affect businesses?

We can be confident that reality will start biting the day after the election, but not before. Recent history has shown that talking too openly about the need to raise revenues does little to boost a party’s electoral prospects. But when reality does bite, it will have its teeth into everything as the next Spending Review is compiled (an issue that we will return to next month). The Treasury is likely to be working up its ‘day-one briefing packs’ soon, and whoever is Chancellor is likely to be presented with an unpleasant rundown of the official view of how much it will cost to replace unrealistic assumptions with deliverable ones. That will probably be followed by some uncomfortable choices over which manifesto commitments might be ‘deprioritised’ to help make the numbers add up, and others that may need to be jettisoned entirely.

Absent some unexpected and material good news from the economy over the coming year, it feels highly likely that the Treasury will be advising a new Chancellor to raise revenues or trim some spending ambitions (or more likely to do both). The only alternative would be to set new, looser fiscal rules – an idea that comes with significant political risk if spun as fiscal incompetence by the other main parties.

Given this backdrop, an important lesson of history is that new governments tend to want to grasp this nettle early when it’s still credible to blame the bad news on the fiscal position they inherited. The first Budget and Spending Review after the election will be significant, setting the tone for the remainder of the Parliament and the parameters for future policy reform on tax and other critical areas of economic policy – only some of which will have been trailed during the election campaign.

If Labour forms the next government, it is likely its manifesto will have ruled out raising the main rates for the largest taxes – as they have already committed to for corporation tax. But the Treasury maintains a long list of potential tax revenue-raisers that would leave the main rates intact: options like reducing the generosity or scope of existing tax reliefs and allowances, raising the rates of smaller taxes, introducing new levies, and clamping down on tax planning.

How can businesses prepare for these risks?

There is a huge amount of uncertainty over which taxes or reliefs a new government might target – and precisely how they might do so. And there are opportunities, too, since the next government will need to be incredibly focused on preserving or boosting growth to protect existing tax revenues.

Businesses can prepare themselves for both by making sure they have the best possible evidence at their fingertips and that they know how to present it and where to deliver it for the greatest impact with policymakers.

In the short term, there are opportunities to do this via formal consultations on the details of the new Carbon Border Adjustment Mechanism, ‘UK ISA’ and vaping levy, on the possible extension to full expensing, and on reforms to the non-dom regime that will impact foreign investors. There will be more consultations on 18 April, earmarked as the next ‘tax administration and maintenance day’. The Treasury also left the door conspicuously open to more evidence on tax-free shopping after the Office for Budget Responsibility’s (OBR) limited review and on the implications of levying 20% VAT on minicabs where it has committed to consult in April.

Looking beyond the election, businesses need to think about how the tax system benefits them today, and whether that support could be at risk in the search for revenue-raising measures early in the next Parliament. Labour’s pledge to conduct a ‘major review of tax reliefs’ is expected to be broad-based with potentially significant reforms not only to business taxes, but to a range of personal tax reliefs that underpin business investment in the UK. It has also committed to fundamentally reform business rates, with any new regime likely to see certain sectors benefit at the expense of others.

The challenge for business is how to get its case heard. Based on our long experience of the UK policymaking process, it is hard to understate the importance of an argument that is well-evidenced and well-presented. Officials need that when they advise Ministers on the best course of action, and then when they take their analysis to the OBR for their stamp of approval before any numbers appear in a Budget. In the best cases, industry papers have been largely co-opted by officials and become the advice that Ministers see.

The OBR is now more open to rewarding smaller growth measures with boosts to the economic outlook than it was in the past. Not only did it estimate that the 2p cut in National Insurance announced last week would add the equivalent of 98,000 jobs to labour supply – it also added the equivalent of 10,000 jobs for the changes to the high-income child benefit charge that were fiscally much smaller.

This means there is more to play for now in setting out a credible and robust economic case for a policy, backed by hard evidence. Credibility with officials comes from using assumptions and analytical frameworks that they will recognise and that they can’t dismiss as biased or self-serving. For politicians, it means framing arguments in a way that reflects their priorities and captures the political opportunity or jeopardy presented by different policy choices. Businesses that invest now to identify and manage future tax policy risks and opportunities – with the right evidence base and supporting arguments – will secure the best commercial outcomes.

This blog was written by Andy King and Ed Odell. Andy leads Flint’s economic modelling and analysis offer, having spent 10 years at the UK’s Office for Budget Responsibility, and before that held senior roles at HM Treasury. Ed Odell leads Flint’s tax policy advice to clients. Before joining Flint, Ed spent eight years at the Treasury advising ministers on a range of domestic and international policy issues, including on business and personal tax reforms. For more information on the topics discussed in this blog, contact us.