Sajid Javid should use the first post-Brexit Budget to make his mark as a tax-reforming Chancellor

Sajid Javid should use the first post-Brexit Budget to make his mark as a tax-reforming Chancellor

We are now less than three weeks away from what, hopefully, will be the date the British people’s instruction from the EU referendum will be implemented by the Government and Parliament. The likelihood is that a general election and a Budget will follow before 2019 draws to an end. So what ought the Chancellor be aiming to deliver in his forthcoming Budget?

Before answering that question, it is necessary to set the scene. Experience tells me that no one can judge how radical a Chancellor will be on tax reform before his first Budget. Recent Chancellors have made significant, if too slow, progress towards eliminating the UK’s annual fiscal deficit, if not, of course, the UK’s accumulated debt. On tax simplification and reform however, the progress, if any, has been at a snail’s pace. Will Sajid Javid have tax reform, targeted tax reductions and tax simplification at the top of his Budget agenda? Until Budget Day, we cannot know. In recent years, Howe and Lawson have been the most radical tax reforming Chancellors. We might have guessed that Lawson would have been so, but few would have guessed it about Howe. Subsequent Chancellors might have talked a good game on tax reform, but the circumstances they faced or, more probably, their determination to face down those opposing radical reform, meant that they didn’t deliver tax reform or simplification.

So what were the obstacles to tax reform, simplification and tax cuts other than their personalities?

Firstly, there is a powerful centrist lobby that asserts that government expenditure cannot be cut and any tax cut must be matched by ‘balancing’ tax increases. Beware especially of lobbyists purporting to be ‘independent’ who are, however, temperamentally opposed to any government spending reduction. Imagine if a CEO told his shareholders that the business would be spending, in the year to 31st March 2020, £670 billion centrally and another £180 billion locally but he had given up trying to find ways to save three or four percent off the cost base or to boost the business’s growth. How long would that CEO keep her/his job?  Those are the sums which will be spent by central and local government in the UK this fiscal year.

Secondly, there are those who point out that the UK’s tax burden is below that of many of our principal European competitors and, accordingly, we should not expect it to be lowered. Globally, however, the picture is very different and many successful economies in North America and Asia/Pacific thrive with much lower state spending (as a percentage of GNP) and lower tax burdens. Those economies are the ones that have been and still are outpacing the EU in terms of economic growth.

Finally, the left – and, regrettably, some in the centre – state that the key priority is to eliminate global tax avoidance. That certainly needed to be a priority a decade ago but, since then, governments have introduced increasingly aggressive anti-avoidance legislation to combat tax abuse and avoidance. There are now no ‘pots of gold’ left out there, which is not to say that HMRC and overseas tax authorities need to ensure that wholly abusive tax schemes are not prevented from succeeding as they emerge.

I’ve written a foreword for a new TaxPayers’ Alliance report on the tax changes that could be made in a No Deal scenario – although, with very recent news of a deal looking more likely, the tax changes recommended in the paper still apply as they focus on growth and productivity gains.

So, what ought the Chancellor set as his overarching principles in the first post-Brexit Budget?

Firstly, a strength of the UK economy in comparison to major EU27 economies has been the so-called ‘New Economy’ driven by our relatively flexible, in European terms, employment market. The Chancellor must ensure that this is promoted and nourished as it is new entrepreneurial businesses which will provide most of the new workplace opportunities in the future. At present, the mismatches between income tax and National Insurance Contributions mean that those with more than one employment and self-employment often pay more than those with a single employment. That penalty should be eliminated immediately.

Secondly, the Chancellor should ensure that the UK economy is the most favourable among the G20 economies to both multinational and entrepreneurial businesses from all tax perspectives, not just having the lowest corporation tax rate. The left might not like it, but the aggregate level of all tax liabilities strongly influences business investment decisions. The best way to meet the need to finance essential government expenditure and transfer payments in the future is not to raise taxation rates and reduce tax incentives, but to increase the pace of economic growth by creating an increasingly and globally competitive tax system. This is not to say that the corporation tax rate should not be cut to match that of Ireland (12.5%) but that there must be a similar focus to match the most tax-competitive major countries from the perspectives of business property taxes, employment taxes and environmental taxes in term of the tax rates levied and the tax incentives provided.

Thirdly, the UK tax system will have broken free from the heavy-handed approach adopted by the European Union attempting to block tax competition. It is true that (as many Europhiles point out) most trade agreements contain provisions to prevent aggressive tax competition (such as exempting the profits generated from exports from corporation tax). However, what the Europhiles do not point out is the increasingly interventionist approach adopted by the EU on taxation matters. For example, the UK cannot currently introduce regional tax investment incentives unless they are restricted to the EU’s prescribed development areas of which the UK has very few (principally the West Country and the Welsh Valleys).

Whilst we need London and the South East to continue to thrive, there are good grounds for more extensive tax incentives across, for example, the North and the Midlands. The Chancellor should take the opportunity he will have to be experimental and test what might be successful. The Thatcher Government had significant success in regenerating economic black spots through its generous Enterprise Zones combing business rates exemptions with full tax allowances upon all capital spending excluding land and residential property. One idea would be offering generous tax reliefs for investment in university- and college-based business start-up funds, targeting areas of above average unemployment or low earnings.

Finally, the Chancellor should match business tax reductions with personal tax reductions to promote incentives and lower living costs for consumers. He should look to abolish some lower yielding and unpopular taxes (inheritance tax comes to mind) to emphasise that entrepreneurs – quite rightly – look at the tax burden they face personally as well as their businesses and that their investment decisions typically involve significant risks which need to be rewarded. Neither the entrepreneurs or their key executives should face the confiscatory marginal rates of income tax of 45% (or even 60% for some earning just over £50,000 per annum or £100,000 per annum). The Chancellor has sufficient headroom to cap marginal income tax rates at 40% in his first Budget. Consumers ought to expect that tariffs will be reduced on imports from outside the European Union as a benefit from escaping its inward-looking, protectionist approach to tariffs. Every Budget should include a list of tariff reductions or, preferably, tariff abolitions.

The main message I have for the Chancellor is that Cabinet roles often last for a shorter time than a newly-appointed minister anticipates and, accordingly, there is no time to waste in making his mark. Being remembered as a bold, tax-reforming and tax-cutting Chancellor alongside the likes of Howe and Lawson would be a great legacy whether in one year’s time or ten.