16 January 2017

Yesterday Philp Hammond appeared to threaten that the UK could become the 'Singapore of Europe' – competing on the basis of low tax and deregulation. But before he goes there, Jill Rutter argues, he could make the UK a better place to do business just by making tax policy better. 

Philip Hammond’s interview with Welt am Sonntag has created quite a stir, provoking comments about a post-Brexit UK initiating a self-harming race to the bottom. But if he had compared notes with NZ Premier Bill English, visiting London last week, he might have found some useful pointers to an alternative way forward.

Talk to New Zealanders about why they have a sensible strategic approach to tax policy making – and a wide consensus in favour of a simple low-rates, few-reliefs, tax system – and they will say it came from the searing experience of their economy falling off a cliff in the mid-1980s. The proximate cause was the loss of the UK markets after Britain joined the European Union. By the mid-1980s they could ignore the uncompetitive reality no longer – and decided to do something about it. They set up independent reviews both of the tax system and the tax policy making process.  And those still form the basis of practice three decades later.

As Treasury officials repeatedly remind us, the UK is not New Zealand – it’s a bigger, much more complex economy. But improving the way we make tax policy would be a helpful addition to the Chancellor’s armoury, as he contemplates how Britain might make up for loss of tariff and non-tariff barrier free access to the EU Single Market.

First, to make Britain attractive he needs to provide more stability and certainty – particularly to those he needs to attract to invest here. That is why we argue in Better Budgets for a more strategic approach to tax policy making, avoiding ad hoc changes and wider use of ‘road maps’ to chart future reform.

Second, we need to get tax policy changes right first time, which is why we want earlier consultation on how best to achieve tax policy objectives – not just on how to implement changes already decided on behind closed doors. We need to take proper account of the burdens of complying with the tax system and stop exempting budget measures from the sort of challenge on burdens that other regulatory measures face.

Third, we need to make sure that any tax reliefs really represent value for money. One person’s tax relief is another person’s tax rise or spending cut – and a competitive tax system should only have tax reliefs that are the most cost-effective way of delivering a policy objective. We also need to be clear what those objectives are – and rigorous and systematic in evaluating whether individual tax reliefs achieve these. 

All this adds up to doing less, but doing it better. An environment of fewer tax changes, better planned and well implemented, and which support wider government objectives, may make for more boring Budgets. But it could make the UK more ‘investable’ – in ways that do not spark unproductive tax competition none of us can afford.