The previous Chancellor focussed his Autumn Statements and Budgets upon the elimination of the UK’s annual fiscal deficit. He did not, of course, achieve this but in the aftermath of the credit quake it was a laudable, if ultimately undeliverable, objective. I think Philip Hammond should learn from this and be determined to leave a personal ‘scorecard’ at the end of his term as Chancellor with plenty of his aspirations met. If I were him, I would want to leave a legacy which established the perspective of being a radical, bold tax reformer determined to simplify the UK’s excessively complex tax system.
Did he provide any indications in the 2016 Autumn Statement that he will be such a bold Chancellor? The answer has to be a ‘no’, but he will have the opportunity in his Spring 2017 Budget to reveal to us whether this is his objective. In 1981, Geoffrey Howe (thought to be another cautious politician) shocked the House of Commons, the press, economists, fiscal pundits and the public with a very radical fiscal package which was widely criticised by economists at the time but is now widely regarded as almost entirely positive. Does Phillip Hammond have the desire to do the same? We will be able to judge this before next summer.
Turning to the measures announced by the Chancellor in the 2016 Autumn Statement, the HM Treasury pack includes a useful section forecasting the impact upon the Exchequer of the measures announced. This is always my first port of call as, understandably, any Chancellor’s speech is determined by political criteria and, increasingly, securing favourable media soundbites. To put the measures announced in context, in 2015/16, income tax collected £169 billion, national insurance contributions collected £114 billion and VAT collected £116 billion. The most significant tax policy changes announced in terms of their impact upon the Exchequer in 2017/18 were the fuel duty freeze (costing £0.85 billion) and the increase in insurance premium tax (collecting £0.68 billion).
No other 2016 Autumn Statement tax announcement will cost or collect more than £0.2 billion for the Exchequer. Such numbers are not what you would expect to see in a bold, tax reforming fiscal event. Interestingly, the above fiscal impacts include the various announcements on combatting tax avoidance including disguised remuneration and salary sacrifice. This well of hidden funds, beloved to recent Chancellors across the political spectrum, seems now to be running dry.
I’ll briefly comment upon Hammond’s decision to stand by George Osborne’s plan to reduce the corporation tax rate to 17% by the end of this Parliament. I strongly believe this to be the right decision. Like it or not, the ‘headline’ rate of corporation tax is a material factor to both foreign direct investors and global entrepreneurs when considering where to locate new business operations. The UK should ensure it does not lose out to competitors. What is at stake is not only the potential corporation tax revenues but also – and often much more importantly – the employers’ national insurance and employees’ income tax and national insurance revenues.
In one very important respect, the competitive scenario for corporation tax rates had already changed before the Autumn Statement. The election of a Republican president and continued Republican control of both the House and the Senate make it very likely that long overdue US corporate tax reforms will be enacted, including a reduction of the federal corporate tax rate from 35% to 15%. If this proves to be the case in 2017, the UK should match the US rate and the Chancellor appears to be committed to doing so. In essence, why would we not want to compete with the US and the other leading G20 economies.