Autumn Budget 2021 reflection - a gateway budget, but to where?
It’s only a couple of weeks since the Chancellor’s last Budget but already the media party has moved on to the next set of juicy political stories. Here in KPMG tax policy HQ we’re left to reflect on the aftermath. Are we staring at a trashed room strewn with broken glasses and spilt drinks, or just a few guests’ overcoats left in the cloakroom?
It certainly felt like a budget that delivered somewhat less than the already muted hype. In his opening remarks on 27 October 2021, Rishi Sunak claimed the Government’s Autumn Budget would
“…begin the work of preparing for a new economy post-COVID… of higher wages, higher skills and rising productivity… of strong public services, vibrant communities and safer streets…an economy fit for a new age of optimism. Where the only limit to our potential is the effort we are prepared to put in and the sacrifices we are prepared to make”.
A nice utopian vision of the future for Britain as the country moves out of the pandemic and set its sights firmly forward, but the emphasis was most definitely on the word “begin the work”, and it was a pretty gentle beginning. The big decisions have by and large been deferred, for now.
It was hard for the Chancellor to avoid the threat that inflation poses to our recovery. He was quick to say that this was a global problem that the UK Government alone cannot solve in the short term; “It would be irresponsible for anyone to pretend that we can solve this overnight”.??He cited the two main reasons as increased demand as economies open up post pandemic putting pressure on supply chains, and surging demand for energy fuelling price rises.
He took a number of measures to help those on lower wages by increasing the living wage and also pulling a last-minute rabbit out of the hat - to reduce the Universal Credit taper rate from 63% to 55%.
The headache of inflation remains, however.?The public finances are now far more sensitive to an increase in interest rates than they were before the global financial crisis.?This may have been the cause of what seemed a cautious Budget which was long on rhetoric but short on meaningful strategic announcements.???
We did discern a few themes that wove their way throughout the budget measures. These may give a hint of things to come.?
A more interventionist approach
Sunak spent much longer making announcements about spending than about tax, and that may be explained by the two significant tax announcements earlier this year; the corporation tax hike and the Health and Social Care Levy.?After these tax rises the Chancellor may have felt he had neither the appetite nor the political leeway to impose more tax increases, although some previously announced measures such as the freezing of allowances and changes to, for example, relief for overseas R&D costs may have the same effect.
With taxes now at their highest level as a percentage of GDP for almost seventy years there was a strong sense of a pivot from low taxes and spending restraint to direct intervention. Not so much on an economy-wide basis as had been the case during the crisis phase of COVID-19, but much more targeted and project focused, supporting particular industries and sectors and continuously making reference to “Levelling Up” (more on that below).?
Does this signify the start of a wholehearted industrial strategy? It’s always hard to tell what is a rehash, what is genuinely new, and how big the commitments are. But time and time again the announcements were for particular places or particular industries. It’s a trend worth watching.
At the end of his speech, the Chancellor was keen to emphasise that he still believes in low taxes, which he presumably hopes to move towards in advance of a general election, but how possible this will be remains to be seen.?There are hints of a sizeable war chest building up – ￡15bn by some estimates – for goodies in 2023. It remains to be seen if this can survive the next 2 years of spending commitments and if so whether it goes on tax cuts, spending growth, or debt reduction.
Levelling up
Levelling up has become common parlance since the Government came to power (coming a close second to ‘Get Brexit Done’).?To many it remains an attractive but nebulous concept. At a fundamental level it is about addressing inequality and that inequality is commonly expressed in terms of geography, with many people considering the policy aim is to improve the economies of regions and cities outside of the South East of England.?
However it is clear that the Government view it as far more multi-faceted.?It is about geography, but it is also about restoring pride in the places people call home by, for example, investing in youth clubs and services, and local infrastructure. It is also about “protecting our unique culture and heritage” through enhancing tax reliefs for the creative sector which has suffered as a result of the pandemic.?
The Chancellor also underlined the unionist angle to levelling up by pointing out that the allocations from the Levelling Up Fund to Scotland, Wales and Northern Ireland were more than their Barnet shares: “We are, and always will be, one family. One United Kingdom”.
So whilst the Government made it clear that levelling up is still firmly a priority, the disparate policy announcements mean the definition remains unclear.?The Government is expected to publish a white paper on levelling up this Autumn, so it will be interesting to see if a clear definition – and thus strategy – emerges, or if levelling up continues to be a catch all concept about tackling inequality.
We think it is worth keeping an eye on how Freeports evolve. They present the opportunity to experiment with generous tax incentives in a way that limits overall fiscal damage. The UK arguably suffers from too homogenous a corporate tax system: there is little fiscal incentive to locate in, say, the North East instead of the Thames Valley. Freeports are, for now, largely about indirect taxes, property and capex, but might we one day see differential headline tax rates there? Nothing in this budget, but don’t count against it.
Rule Britannia?
“And now that we’ve left the EU”, the Chancellor declared “we have the freedom to do things differently and deliver a simpler, fairer tax system”.
Threads on the benefits of Brexit ran through the Budget speech, with the Government announcing a series of measures aimed at promoting the national agenda. These included:
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In the background the government has also abolished cross-border group relief, though this is rather less of a crowd pleaser than Alcohol Duty so it’s no surprise it didn’t make the speech.
In the grand scheme of things though, these seemed fairly muted announcements, moderated even more by the fact that APD aside they are consultations and won’t take immediate effect.
As to what the long-term vision is for tax post-Brexit, that remains unknown. In principle the hard version of Brexit the country underwent allows for significant divergence or even a complete overhaul of the VAT system, and a major ramping up in certain types of state aid including sectoral incentives. In practice though, there is only so much work HMRC and HM Treasury can do in a short space of time. The postponement of the next phase of Making Tax Digital illustrates this.
Net zero on net zero
Perhaps the most surprising gap in the Chancellor’s speech was net zero.?The timing of the Autumn Budget just a few days before COP26 made many commentators (us included) think that there would be a big unveiling on net zero, but it was almost silent. Barely a nod.
There were two measures with a climate change theme but both going in the opposite direction.?Firstly a cut in Air Passenger Duty in relation to domestic flights which the Chancellor later defended as a pro-union policy.?Secondly, the freeze in fuel duty for the 13th year in a row.?This measure was expected and probably sensible bearing in mind the increasing pressure on household finances but it remains difficult to square within the wider climate change debate.
It is not clear why net zero was so notably absent.?Perhaps the Chancellor felt that enough had been published in the days before the Budget.?The Government published its ‘Net Zero Strategy: Build Back Greener’ detailing its plans to make the UK met zero by 2050.?HM Treasury also published a separate report analysing the fiscal impact of these plans and warned that new taxes may well be needed to deliver decarbonisation sustainably over the next 30 years.??
More recently, at COP 26 the chancellor announced a Financial Alliance comprising $130 trillion of private capital to be deployed around the world.?But it still feels like the net zero ambitions lack the underlying detail of how it will be delivered and how it will be paid for ‘on the ground’.?For now, tax doesn’t seem to be this government’s preferred tool to achieve it, either as carrot or stick. Instead targeted subsidies, and regulation, are the name of the game.
What we expect, or hope for, in 2022
It is easy to find the flaws in the Budget but it is more difficult to suggest what is needed.?
From a non-tax perspective, whilst the Government has ‘Got Brexit Done’ there still remains the rather difficult statistic that the OBR expect the economic scarring from Brexit to be worse than from the pandemic.?The Government will be conscious that they have to start realising tangible Brexit dividends.
It is also unclear where the ambitions in relation to higher skills and productivity will come from and how they will be delivered.??And whilst there were many comments on levelling up in the speech and there were some spending commitments the announcements were not huge, and the overall strategy remains unclear.??That lack of overall strategy can also be seen in other areas such as net zero and the reform of social care.
So if there is a common theme of what is needed, it is one of strategy.?
The Government response to the pandemic was akin to a war: radical Government intervention in response to unprecedented challenges.??The size of the state has grown.?Last year public spending represented over 50% of GDP for the first time since 1945/46 and tax as a proportion of GDP is the highest it has been in decades.?
With such a high tax take the Government needs to provide a clear strategy for how it intends to place the UK at the heart of the global economy as a competitive and strategic location for investment.?It needs to demonstrate how the high spending and high tax environment we now find ourselves in will be translated into real tangible economic benefits and a business location which allows businesses to flourish with the knock-on impact on productivity, jobs and skills for the good of all.
The UK has already announced an increase to the headline corporation tax rate to 25% and whilst this will still be the lowest within the G7, the amount a business pays is actually a function of both the rate and the base.?The UK has a broad tax base, meaning the competitive rate is not as generous as it seems at first.
With President Biden’s proposals for increased taxes being gradually whittled down in the US, and precious few other countries increasing corporation tax rates to pay for the pandemic, the question of the UK’s continued competitiveness in the light of the corporate tax rise becomes crucial.?
Being free from EU regulation does provide an opportunity for the UK to flex its policy muscles to reduce the scarring effect of Brexit and reap those elusive dividends.??The trick is to find a way to exploit these freedoms and meld them with the wider industrial strategy, but one which has at its heart progress where it is most needed –the environment, inequality (including the tricky subject of intergenerational equity) and social care.
The Government’s Freeport initiative is a catchy start but businesses love certainty and signposting on the direction of travel.?It has worked well in the past and would work well again.
A welcome addition would be a tax and investment road map for the UK which sets out a comprehensive strategy melding the Government’s innovation agenda with improvements for society as a whole, perhaps providing tax incentives for investment in technology that advances the net zero agenda and medical or health improvements – who wouldn’t be willing to give a tax break to the business that cures cancer?
This would allow the UK to showcase tax competitiveness in the areas that matter, those that reap real public benefits.