A quiet budget in a noisy tax environment A quiet budget in a noisy tax environment

Now that the dust has settled after the Autumn Budget, we’re left to reflect on a Chancellor’s speech that delivered even less than the already muted hype suggested. However, a few clear themes emerged from the measures announced, which may give a hint of more significant changes to come.

The Chancellor struck a bold tone in his opening remarks, pledging the Budget would “begin the work of preparing for a new economy post-covid…an economy fit for a new age of optimism.”

However, the operative words here were ‘begin the work”. As is turned out, big decisions were largely deferred.

One issue Rishi Sunak couldn’t avoid tackling was rising inflation. He announced measures to help lower earners: increasing the living wage, and cutting the Universal Credit taper rate from 63 percent to 55 percent.

But the threat of inflation remains. Public finances are far more sensitive to an increase in interest rates than before the global financial crisis. This may explain the overall cautious tone to the Budget, which was long on rhetoric, but short on meaningful, strategic initiatives.

There was much more on spending than tax. That might be explained by two major tax announcements earlier this year: the corporation tax hike, and the Health and Social Care Levy. With taxes at their highest proportion of GDP for almost seventy years, Sunak may have neither the appetite nor the political leeway for further tax increases.

That said, some previously announced measures may have the same effect – namely, the freezing of allowances, and changes to overseas R&D relief.

Overall, however, there’s a perception of a government pivoting away from low taxation and spending restraint, and towards direct intervention. No longer on an economy-wide scale (as we saw during the crisis phase of the pandemic), but in a more targeted way. This was evident in support for certain sectors, and Sunak’s frequent references to levelling up (more on that below). Is this the start of a wholehearted industrial strategy? It’s a trend worth watching.

Closing his speech, the Chancellor reaffirmed his belief in low taxes, which he presumably hopes to return to ahead of the next general election (if circumstances allow). There are hints of a sizeable war chest for giveaways come 2023 –£15 billion by some estimates. We’ll see if that survives the next two years’ spending commitments, and if so, whether it goes on tax cuts, spending or debt reduction.

‘Levelling up’ has become common parlance since this Government came to power. To many, it remains an attractive but nebulous concept, generally taken to mean addressing geographical inequalities - for example by improving local economies beyond the South-East of England.

Based on the Budget announcements, the Government clearly thinks it’s about more than just this. It means restoring pride in the places people call home, by investing in local infrastructure, services and amenities. And it means “protecting our unique culture and heritage”, through enhanced tax reliefs for the lockdown-ravaged creative sector.

The Government are keen to demonstrate that levelling up strengthens the Union. Sunak declared that the allocations for Scotland, Wales and Northern Ireland from the Levelling Up Fund will be higher than under the Barnet Formula. And although the first operational Freeports (economic zones with special tax incentives) will be in England, the Government reiterated its commitment to establishing similar zones in Scotland, Wales and Northern Ireland in the future.

Although levelling up remains a firm priority, disparate policy announcements mean its definition, and thus a roadmap to achieve it, remains unclear. The Government is due to publish a white paper on the issue this autumn. It will be interesting to see if a defined vision and strategy emerge.

Perhaps the most glaring omission from Sunak’s speech was the UK’s net zero commitments. With the Budget falling just days before COP26, many of us expected a big unveiling on decarbonisation. There was barely a nod.

In fact, the two measures with a climate change slant went in the opposite direction: the cut in domestic Air Passenger Duty, and a thirteenth successive fuel-duty freeze. This latter measure was expected, and probably sensible given the squeeze on household finances. But both are difficult to square in the context of climate change.

Maybe the Chancellor felt enough had been announced ahead of the Budget. The Government published its ‘Net Zero Strategy: Build Back Greener’ paper, detailing its plans to achieve net zero by 2050. The Treasury produced a report on the fiscal impact of these measures, warning that new taxes may be needed to sustainably deliver decarbonisation over the next 30 years.

Nevertheless, there remains a lack of detail on how net zero will be delivered and paid for. For now, tax doesn’t seem to be the Government’s preferred tool, either as carrot or stick. Regulation and subsidies are the name of the game.

“Now that we’ve left the EU”, the Chancellor stated, “we have the freedom to do things differently, and deliver a simpler, fairer tax system”.

References to the benefits of Brexit ran through his speech. He announced a series of measures promoting the national agenda, including changes to:

• Tonnage tax – encouraging more firms to headquarter in the UK and fly the UK flag on vessels
• Alcohol duty – simplification of the system, aligning duty rates to alcohol content, and encouraging domestic production of low-alcohol beverages
• Air-passenger duty (APD) – cutting the rate for domestic return flights, and increasing it for ultra-long-haul journeys
• Research and development – expanding the scope to include data and cloud-computing costs, while refocusing reliefs on domestic activity

He also abolished cross-border group relief – though this naturally is less of a crowd pleaser than Alcohol Duty so this announcement was made in the small print following the speech.

Overall, these were fairly muted announcements, however – and only the APD changes take immediate effect. The other measures subject to consultation i.

The wider vision for post-Brexit tax remains unknown. In principle, the UK’s hard Brexit allows for significant divergence from EU tax rules. But in practice, there’s only so much HMRC and the Treasury can do in a short space of time.

The Government may have got Brexit done, but it can’t escape the Office for Budget Responsibility (OBR) forecast that the resulting economic damage will be worse than that from the pandemic. Tangible Brexit dividends will need to be produced.

What’s more, there’s a question mark over how higher skills and productivity, and social care reform, will be delivered. And as noted, the strategy for levelling up and net zero remain unclear.

In our view, the Government needs to set out detailed strategies to achieve these national imperatives.

We would also like to see its vision for putting the UK at the heart of the global economy.

The Government needs to set out how it will make the UK a strategic, competitive investment location: a highly skilled, highly-productive environment, where businesses can flourish for the good of all.

To add to the challenge, the UK’s headline corporation tax rate is due to rise to 25 percent. This will still be the lowest among the G7, but the amount businesses pay is a function of both the rate and the base. Given the UK’s broad tax base, the rate is not as competitive as it seems.

With the fallout from pandemic to pay for, few other countries are looking to raise corporation tax just now. In the US, President Biden’s proposed rate rise seems to have been abandoned. All of which brings the UK’s international competitiveness into question.

Being outside the EU allows the UK Government to flex its policy muscles, to soften the impact of Brexit and reap those elusive dividends. The trick is to exploit those freedoms to shape an industrial strategy that fosters progress where it’s most needed.

What’s required in our view is a tax and investment roadmap for the country: a comprehensive strategy, which fuses the Government’s innovation agenda with improvements for society as a whole. That’s how to truly showcase the UK’s global competitiveness, in the areas that will reap genuine public benefits.

I published a longer article here on LinkedIn. Follow me for more