Key tests for the emergency budget
–Thomas Story is tax director at BDO LLP. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-
Ten key tests by which Chancellor George Osborne will be judged when he delivers the emergency budget on Tuesday:
1. Do the tax measures make a significant contribution to reducing the fiscal deficit?
The Chancellor is caught on the horns of a dilemma with the promise of various tax cuts contained in the coalition agreement needing to be offset by larger tax rises in the emergency budget to help plug the gap in the government’s finances. However, this may allow some targeted tax cuts to be introduced from 2011 but only in small steps as the economy improves.
2. Will the total tax take be re-focused towards indirect taxes upon consumption and away from taxes upon income and profits?
It would be a massive surprise if there was no announcement of a significant VAT uplift on Budget Day. On current projections VAT is anticipated to bring in 78 billion pounds for 2010-11 and a rise to 20 percent could add up to a further 11 billion pounds. Given that the Chancellor is unlikely to have an opportunity to raise VAT again this parliament, he may be tempted to raise the rate even higher with a promise to reduce it once the deficit is under control.
3. Which indirect stealth taxes could be raised whilst attention will be focused upon the increased VAT rate?
In essence, there are two classic forms of stealth tax: increases in low profile taxes; and failing to increase rates and allowances in line with inflation. Both forms of stealth tax can be anticipated, although the lion’s share of tax rises will need to come from income tax, national insurance or VAT. Only these three taxes could sufficiently raise the aggregate amount of tax to make a substantial impact in the context of the 150 billion pounds plus fiscal deficit.
4. How will the emergency budget ensure that Britain’s competitive position for global businesses been protected, and, indeed, enhanced?
Reducing the fiscal deficit must be the number one priority for the coalition government, but it is hoped that the emergency budget will be an opportunity to introduce a number of broad business-friendly measures that will help to boost the business economy to deliver the economic growth that is ultimately necessary to fund the government’s ongoing commitments to essential frontline services and key initiatives.
5. To what extent will the foundations have been laid for tax cuts in 4 to 5 years’ time before the next election but after the fiscal deficit has been slashed?
When this emergency budget is recalled in five, 10 or 20 years time, the acid test of its efficacy will be whether it has set out a robust framework of spending reductions and, unavoidable targeted tax increases which enabled the economy to be rebalanced towards private sector led growth, underpinned by a simpler, flatter taxation system with lower marginal tax rates.
6. Where might the Chancellor bow to sectional and vested interests by continuing with reliefs that erode the scope for aggressive cuts in both business tax rates and personal tax rates in the future?
The coalition government has made a commitment to reform the corporate tax system by simplifying reliefs and allowances, and by tackling avoidance, in order to reduce headline rates. This can only be achieved by standing up to the myriad of special interest groups which will plead that their sector is a special case for retaining (or even extending) particular, over-targeted and expensive tax reliefs resulting in unnecessarily high business and personal tax rates.
7. Will the budget measures represent a first step towards a simplified taxation system?
It would be all too easy for an incoming government to view tax simplification as a worthwhile but not pressing technical exercise and defer any action until later budgets. This would be a serious mistake due to the magnitude of the fiscal and economic challenges and would represent a significant missed opportunity.
8. How will the tax changes protect and incentivise those working part time or on low wages?
The principle of reducing marginal tax rates on lower paid workers should entice more individuals into the labour force. It would bring in additional tax receipts, whilst simultaneously reducing the relative incentives for individuals to rely on costly benefits. However, care must be taken that the cost of increasing the personal allowance is not balanced by tax increases. This would directly, or indirectly, damage the capacity of businesses to provide the employment opportunities required to achieve the benefits of this objective.
9. What percentage of the total tax take does HMG consider should come from corporation tax and other taxes which fall principally upon the business sector?
The Lib Con Coalition Agreement makes it clear that they will consider proceeding with the increase in the employers’ national insurance threshold as part of a programme of taxation reform “to make it more competitive, simpler, greener and fairer”. It is hoped that the Government has recognised that the headline rate of corporation tax is increasingly uncompetitive when compared to our near European neighbours.
10. Does the Chancellor consider the tax take from CGT and IHT should rise in comparison to the GNP, track the GNP or fall in comparison to the GNP?
A clear policy should be established for this Parliament to enable businesses and individuals to plan with some certainty the future tax consequences of their investment transactions and family arrangements.