The big Brexit story of the weekend was the Chancellor’s comments to a German newspaper about UK economic competition. This was widely reported in the press as a pledge for the UK to become a tax haven – although what Philip Hammond actually said, in response to a question around perceptions of the government’s plans, was “I personally hope we will be able to remain in the mainstream of European economic and social thinking. But if we are forced to be something different, then we will have to become something different”.
Regardless of what Hammond meant to signal, this is another reminder that “competitiveness” is often seen as entirely synonymous with “changes to the tax regime”. It is undoubtedly the case that taxation makes up a core part of a government’s economy policy. And in the event where the UK leaves the single market, this will mean that the government will have greater scope to change our tax structures. But seeing tax cuts as a silver bullet to competitiveness is overly simplistic and even dangerous.
Yes, cutting taxes, through reduced rates, tax reliefs or incentives does affect competitiveness – aka the likelihood of businesses to see the UK as a good place in which to locate and invest – in many instances. But the picture is more complex than “if we had lower taxes and less red tape, then the UK’s economy would automatically prosper,” which is what the conversation in the press and amongst some politicians seems to boil down to.
Instead, there are deeper questions to be asked around the meaning of competitiveness – a competitive economy is as much about stability, certainty and a process that everyone can buy into. An economy that makes Britain a favourable place for multinational businesses to locate and smaller businesses to thrive – not just because of low taxes but thanks to well-resourced public services, high living standards and a quality education system, all of which affect the employees of those businesses. What Brexit will mean for long-term productivity, a balanced workforce, and living standards in the UK needs to be taken into consideration. How should tax policy adapt to these longer term changes? These are questions that clearly unite a range of different stakeholders across business and civil society, many of whom heavily contest using tax as a “political football” to attract certain voting demographics at the expense of others in society.
This week also sees the launch of the “Better Budgets: Making Tax Policy Better” report from the Institute for Government, Chartered Institute of Taxation, and the Institute for Fiscal Studies. The report takes a look at the current tax policy making process and the way that the Government makes tax and budget decisions. The report advocates greater stability, calling on Government to establish clear guiding principles and priorities to indicate the direction of policy. The report also recommends improved consultation by engaging stakeholders as early in the policy making process as possible, and using independent external reviews as a mechanism for public engagement in the policymaking process. It is critical of the current scrutiny measures in place, both in relation to Parliamentary and public scrutiny, and measuring and evaluating the effectiveness of tax policies.
These are all issues that have been commented on frequently in our own responsible tax conversations, and which become of heightened importance in the Brexit climate. It is vital to have firm principles in place for what changes to the tax structures in the UK are based on, and what they aim to achieve. (The Institute of Government is an organisation that focuses on improving processes and mechanisms in Whitehall and therefore it is not in the remit of this report to suggest what those principles might look like.) Public understanding of these principles is as important as the stability provided to businesses. Furthermore, scrutiny of political decisions is key particularly when many people are still feeling bruised by a divided vote. Although welfare expenditure and benefits are heavily scrutinised by Parliament and the media, civil society groups and the public lack insight into the rationale for, and purpose of, the £100 billion that goes each year into tax reliefs.
Later this month we will be commencing a new workstream from the Responsible Tax Lab: Designing a responsible tax policy for Brexit Britain. In partnership with the TUC, we intend to take a “first principles” approach to tax policy, to set the stage for the questions which will need to be asked during the Brexit process. When are tax reliefs, incentives and “deals” legitimate in addressing an economic imperative, and what factors contribute to how they are used responsibly? What principles will underpin tax policy making in relation to a post-Brexit industrial strategy which achieves balanced growth and jobs in the UK? And what does constructive tax policy making look like that serves the interests of all in society, and who needs to have a stake in the process? These are some of the questions that we will be asking in the coming months. For further details and to contribute your thoughts on some of these issues, contact email@example.com.