The chancellor has missed opportunities to lay the ground for tax reform
Rishi Sunak failed to use the budget or the government’s new ‘tax day’ to set out a coherent vision for the tax system
Rishi Sunak failed to use the budget or the government’s new ‘tax day’ to set out a coherent vision for the tax system or to start laying the ground for the difficult tax choices that will be needed. Gemma Tetlow says this omission will make it much harder for the government to make the substantive reforms that are required
There are long standing problems with the UK tax system – it creates more distortions and discouragement to economic activity than it need. Various trends are weakening the UK’s fiscal sustainability. The partially tax-induced growth in the prevalence of self-employment is reducing revenues from taxes on work, as the self-employed are taxed less heavily than employees. The shift to electric vehicles is undermining revenues from fuel duties: as former chancellor George Osborne told a recent Institute for Government event, “replacing motoring taxes is going to be a huge challenge for a chancellor – either this one or the next one”. Growing demands for more resilient public services and long-standing demographic trends are also creating growing pressure to increase public spending. The government’s commitment to reaching net zero will also require changes to ensure the tax system appropriately incentivises this transition and raises the revenues needed to finance it. These issues have long been highlighted by the Institute for Government and other experts outside government.
But they have been understandably hard for governments to address. As former chancellor Alistair Darling told us in an interview, “the only popular tax in this country is the tax that somebody else pays”. However, there are ways that the chancellor could create opportunities to make the necessary changes. One important ingredient is explaining to the public why changes are needed and having an open debate about the merits of alternative options. In the words of Osborne, “you can raise taxes [but]…you need to have explained why you’re doing it – you either need to make the rationale around sound public finances or else in a particular space explain why this policy change is necessary…When you can see the problem coming at you, the longer the run-in…to dealing with it, the better.”
Expectations had been raised earlier this year that Treasury ministers might be about to start opening up this debate. In February, financial secretary Jesse Norman told the Treasury Select Committee that the government would publish a range of tax consultations on a new ‘tax day’ after the budget. This prompted a range of tax experts to anticipate the chancellor using this as “an opportunity to signal his intent on tax changes – including potential tax rises further in the future”, as the Financial Times put it.
Neither the Budget nor “tax day” set a direction for the future
But ultimately both the Budget and tax day were a let down in terms of laying out any serious vision for the tax system or making any attempt to create space for much-needed tax changes and tax rises.
Sunak was under no immediate pressure in the Budget to explain fully how he would return the UK’s public finances to a sustainable position. Almost all economists were of the view that now was not the time for fiscal retrenchment and the opposition Labour party had made clear they would oppose immediate tax rises. This offered the chancellor an opportunity to start making the case for future tax reforms to get the public onside and build political support.
But that was not the path Sunak chose. Instead, the Budget laid out firm plans for a substantial net tax rise – which on the face of it will return the public finances to balance within five years – but relied on delivering this entirely through measures whose consequences are least immediately apparent to the public and which do not make necessary structural changes to the tax system. In particular, he focused on a large increase in corporation tax and freezing income tax thresholds for several years. In doing so, Sunak delivered a Budget that was politically popular but simply postponed the problems.
The range of documents released on tax day also failed to suggest any coherent vision for the future direction of the tax system. The new tax day was welcomed by some tax professionals and may prove useful in helping to ensure proper scrutiny of individual tax changes. But it did not convey any clear policy objectives for the tax system that might help the public to understand the benefits of what the government is trying to achieve or help make the case for some of the difficult choices that are likely to be needed in future. To the extent that there was any coherent strategy in the documents, it related solely to administrative and compliance issues, not to the fundamental objectives of tax policies.
Sunak could still change tack and do what is needed to facilitate serious tax reform
It is not too late for the chancellor to start trying to make progress on substantive tax reforms.
Whether or not he will be forced to do so is uncertain but if the fiscal plans laid out in the Budget fail to materialise, he could be required to revisit his tax plans. In particular, if the economy recovers less strongly or if the government is unable to squeeze public spending in the way the budget figures imply, Sunak could come under pressure to find more money from tax rises. As former chancellor Norman Lamont told a recent IfG event, “I personally will be surprised if these tax increases are the last tax increases we see.”
If Sunak wants to make more substantive changes to the UK tax system, he needs to start explaining more clearly to the public what he is trying to achieve, what the options are and building public and political support for the changes required. As Darling told us, “when you make big structural changes in tax, it does take an awful lot of rolling the ground before you start.” Sunak’s approach to the Budget and tax day are not encouraging, but it is not too late to change tack.
- Supporting document
- Better_Budgets_report_WEB.pdf (PDF, 604.33 KB)
- Topic
- Public finances
- Position
- Chancellor of the exchequer
- Public figures
- Rishi Sunak
- Publisher
- Institute for Government