Tax reliefs should be considered in the spending review and industrial strategy

For the forthcoming multiyear spending review, the Treasury has taken the welcome step of asking all departments to conduct a ‘zero-based’ review of all their spending – assessing the value for money of every pound spent. 

But, as we argued last year, this approach needs to encompass not just departmental budgets and welfare spending (as Treasury chief secretary Darren Jones signalled in a speech at the IfG) but also non-structural tax reliefs that are designed to advance specific economic or social objectives. While such reliefs are aimed at much the same objectives as public spending, they are not cash limited, nor subjected to the same value for money testing when introduced, nor any regular review after their introduction. So it is vital to examine whether these policies are the most cost effective way of achieving government’s aims. According to HM Revenue and Customs, there are 107 such non-structural tax reliefs, costing the exchequer £207 billion a year. ¹⁶ https://www.gov.uk/government/statistics/main-tax-expenditures-and-structural-reliefs/non-structural-tax-relief-statistics-december-2024  This is equivalent to 46% of all day-to-day departmental spending. They include such items as tax credits for research and development and charitable donations.

The new thematic value for money reviews – to be conducted between spending reviews – which Jones announced last week, should also encompass tax reliefs, as they do for example in similar reviews in the Netherlands.

The substantial tax reliefs offered to businesses should also be examined in the industrial strategy

For similar reasons, as it develops its industrial strategy, the government also needs to examine the effectiveness and value for money of the multitude of tax reliefs already offered to businesses.

People may not think of the UK as a major, active user of industrial support. But analysis by the OECD shows that the UK devotes more public money to business support than other comparable advanced economies. ¹⁷ https://www.oecd.org/en/topics/quantifying-industrial-strategies.html  But, rather than providing this support largely through grants, subsidies, loans and equity injections as many other countries do, the UK instead channels almost all its support through the tax system. ¹⁸ https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/quantifying-industrial-strategies/QuIS-UK-factsheet.pdf  According to the OECD, in 2023, the UK spent 2.3% of GDP (£62bn) on industrial support through the tax system.

The industrial strategy needs to look at all these policies alongside other programmes aimed at supporting key sectors. For example, one of the eight “growth-driving” sectors identified in the industrial strategy is creative industries. The government already channels over £2.6bn a year to creative industries through an array of tax reliefs for films, TV, video games and more.  ¹⁹ https://www.gov.uk/government/statistics/main-tax-expenditures-and-structural-reliefs/non-structural-tax-relief-statistics-december-2024  The government’s corporate tax roadmap ²⁰ https://www.gov.uk/government/publications/corporate-tax-roadmap-2024  commits to "maintain an Audio-Visual Expenditure Credit for film and high-end TV producers, and a Video Game Expenditure Credit for video game developers", but the Treasury should assess their effectiveness and value for money when deciding what else to do for this sector.

One area where the UK stands out is in its preferential tax treatment for small businesses. For a government set on boosting business growth, the Treasury should assess whether this tax structure provides the best possible outcomes or whether there could be better ways of supporting new and growing businesses.

Net zero is another obvious area for attention. The tax system currently actively disincentivises the transition to net zero: without reform, other policies will be fighting an uphill battle.

In developing the final industrial strategy, the Treasury should work with the business department and other relevant departments to look across the full array of potential government interventions and assess how support can best be channelled: nothing should be off the table.

The Treasury must apply the same scrutiny to itself as it does to other departments

The Treasury has been reluctant to do this in the past, fearing that putting tax in scope of the spending review and industrial strategy will open the flood gates to proposals from other departments for new, costly reliefs. But this fear is misguided. The Treasury and the chancellor have complete control of tax policies: no other department can get these onto the statute book without Treasury approval.

But the Treasury needs to apply to itself the same rigour it demands of other departments and to weigh its own policies up against other alternatives when deciding how to allocate resources. Other departments are required to justify and evidence the value of money they request from the Treasury and Jones has said he wants departments to work together to develop proposals for the spending review. The Treasury’s tax teams (and their HMRC counterparts) should be required to do the same: demonstrating that tax reliefs are achieving their desired aim and are the most cost-effective way of doing so. But, as we have repeatedly highlighted, the Treasury does not hold itself to the same high standards as others. This needs to change.           

With the government facing tough choices this year about where to direct limited public funds, it is vital that all areas of policy and expenditure are scrutinised. It is high time the Treasury entered the ring and tested its own tax relief policies against the same criteria it applies to others.