Lord Nick Macpherson, the former permanent secretary at the Treasury, wrote eloquently in the FT last week about the realities of Chancellor's Budgets ("The power of political theatre explains Budget’s enduring mystique "). Two statistics stood out:
- over more than 30 years, the UK’s tax take has “remained completely static” (33.9 per cent of national income in 1984-85, this year 33.7 per cent).
- the British productivity gap is an eternal issue: “All of the 34 Budgets I worked on as an official had productivity and growth as a central theme. Yet for all the interventions designed to make Britain more productive, the underlying growth rate has remained stubbornly unchanged at about 2.25 per cent. "
Chancellors tend to tinker in Budgets and increasingly focus on national housekeeping - revenue and spending. This week's may be no different. There were reports this weekend that the Chancellor may raise tax on the self-employed to pay for the rising costs of social care and additional small firms relief on business rates.
There may also be tax rises and additional austerity measures to create a "£60billion Brexit warchest" - a contingency fund to enable the Chancellor (in the event that things don't go to plan) to counteract any economic impact of the Brexit deal over the next few years.
This is no doubt prudent and sensible. What would make this a truly great Budget would be if the Chancellor also seized the opportunity to pave the way for significant tax reform.
As Lord Macpherson points out, once in a generation a Chancellor uses the Budget to truly reform the system. The last significant example of that may be Nigel Lawson, 30 eyars ago.
Now is the right time to ask some fundamental questions about the nature of taxation in the UK, particularly as we leave the EU. Business, government and society needs to consider, from first principles, what the right balance is between taxing profits, sales, employment and property. Our current tax system taxes all of these. Tax on jobs and employment outweigh any other business taxes. We have to consider whether this is the best way of unlocking growth. There are signs the Chancellor may announce a review of tax in the 'gig economy' - looking at self employed. This would be a start.
At the same time, tax on business premises (business rates) is based on a pre-digital model of the economy. Business premises no longer reflect the size or impact of a business and so it is an anachronistic measure, which penalises specific sectors and size of business. So as well as short term measures mitigate the effects of rate revaluations, now is also the time to look fundamentally at whether the system is still fit for purpose. And corporation tax – taxing profits at the location of a business’s HQ – was designed in the 1920s but no longer stands up in today’s global, digital economies. It is time to consider whether a simpler system would better fit today’s economy and restore fairness and revenues and reduce administrative costs.
Alongside this, and as part of the government’s industrial strategy, a fundamental look at tax reliefs is also overdue. Many of these are additional complexities or sticking plasters to try to correct problems caused by already complex and anachronistic tax regimes. Equally, little evaluation has been done by successive governments of the economic benefits of tax reliefs. It would help to start with a clearly defined set of aims for tax reliefs to encourage investment in growing businesses, encourage reinvestment when assets are sold; and support growth and productivity though exporting, skills, employee engagement and growth capital.
Government is currently consulting on a comprehensive industrial strategy and significant reforms to company law. These are intended to create economic policies fit for the future economy and ready to seize the opportunities and address the challenges of Brexit. Taking the same approach to tax – a consultation on radical reform, prompting a meaningful debate from first principles – would be the missing piece in the jigsaw.
Budgets should be about the noble aim of delivering a better tax system.