Transcript for: Talking Tax - Episode 12: What will see in this year’s Chancellor’s Budget?

Episode 12: What will see in this year’s Chancellor’s Budget?

02/03/2020

500 days since the last Chancellor’s Budget, what announcements are we likely to see from Rishi Sunak on 11 March? Anna Wallace, Corporate Affairs Director at PwC discusses with Jon Richardson, PwC’s Head of Tax Policy and Gavin Barwell, ex Chief of Staff to Teresa May and current special adviser to PwC.

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Anna Wallace

Hello and welcome to PwC’s Talking Tax Podcast. I am Anna Wallace Corporate Affairs Director, and today we are talking about the forthcoming budget. The Chancellor of the Exchequer, Rishi Sunak, will present his first budget on Wednesday, 11th of March, just four weeks into his new role and exactly 500 days since the last budget was presented by Phillip Hammond.

PwC’s tax experts, economists, and industry specialists have shared their predictions and expectations for the budget, and that’s what we are going to cover in the podcast today, but if you want to go through it in more detail, then please do visit our website, pwc.co.uk/budget.

I am joined today by Jon Richardson, our head of Tax Policy at PwC; and Gavin Barwell, former Chief of Staff to Prime Minister, Theresa May, and also former Housing Minister and acting as a strategic advisor here at PwC.

Guys, let’s just set the scene here a little bit, and Gavin perhaps you could start us off. Is it worth spending a moment about the cabinet reshuffle and our new Chancellor, and what that might mean for March 11th.

Gavin Barwell

Obviously, we were expecting this to be Sajid Jaavid’s first budget, and we’ve had this change. On the surface, his departure was an argument about political advisors in number 10 and number 11, and who is in-charge of them, but underneath that, there was a more important economic argument, which is that number 10 had worked out that the fiscal rules that they signed up to, now mean that they face a choice, between either breaking the rules or not doing the kind of spending that they want to do postelection, or having to raise taxes, and that’s a choice they don’t really want to take. Therefore, one of the most interesting things to look out for in this budget is whether or not we see the fiscal rules revised again.

Anna

Okay, whether or not there is a fiscal revision, what does that political context mean for what we might see in the budget, at the narrative level?

Gavin

Domestically, the overwhelming political priority for this government is trying to level up our economy, trying to improve opportunities for people living in towns, in the midlands, and North of England. The government is very clear that it needs to secure this new electoral coalition that it build at the election, and that they are not going do that just by delivering Brexit.

What you are likely to see is significant increase in government investment in infrastructure and also changes to the rules about how that money is distributed around the country. Traditionally, the treasury perhaps perfectly rationally has tried to focus the money in the places where it thinks it is going to get the best overall economic return for UKPLC, but I think what you are now going to see is a political decision to focus more of the money in those areas that have been, if you like, left behind. The extra money will not just go on the big ticket stuff, major transport infrastructure projects, but also more small scale civic infrastructure.

If you look at PwC’s future of government research that suggested that investment is going to be really well made, because how we all feel about the places where we live goes a long way to shaping, whether we feel this is a fair country or not. Actually, small scale changes to our local community can do a lot to address people’s concerns about their local community.

Anna

That’s really helpful, Gavin. Thank you.

That’s the political context, Jon, but this is a talking tax podcast, so give us some of the highlights on what it might made from a tax point of view?

Jon Richardson

Obviously we are expecting increased spending, there has obviously been lots of indication of that. As Gavin said, if we get a relaxation in fiscal rules, that will give some real good room for the Chancellor to do that spending, but if he doesn’t do that, he has got at least one hand tied behind his back with the triple lock that was guaranteed in the manifesto, income tax, NIC, and VAT.

If he does need to raise real revenue through tax increases and he can’t raise the rates, he has really got to do it through broadening the base or introduce new taxes. Introducing new taxes is looking pretty unlikely. We’ve obviously seen lots of mansion tax and wealth tax, which look off the agenda. If he is going to raise increased tax revenue, he is going to have to broaden base, which basically means he is going to have to look at reliefs.

We have obviously heard quite a lot in the press around pension relief, entrepreneurs’ relief, etc., so I expect we could see stuff on that, but it is interesting, there are many other reliefs he can look at. The national audit office, for instance, issued a report on Valentine’s day and they set out in there is 1190 tax reliefs in our system, which might explain why we’ve got about two legislation when it sits on my desk, and that accounts for 155 billion of tax. There are various other areas he could look at in terms of revenue raising.

Anna

Great, and we are going to come to climate change and productivity, but I just wanted to pick up specifically around the digitalized economy. Lots of noise, both in terms of tax debate, but also trade discussion around how we get on top of the digital services and how we tax the modern economy. Can you say a few words about that?

Jon

Yeah sure. There are two sides to this. There is the, how do they tax tech in the technology world, but also how do they help the retail high street, those are the two sides of that, maybe, if I just touch on the taxation of the tech world and the tech companies. We heard only yesterday around the House of Commons the debate around taxation of tech companies. Clearly, at one level there is a lot of public opinion around people wanting to see more tax coming from that, at the other end of the spectrum, we’ve got the need to agree free trade agreements with the US.

We have got the digital services taxes enacted and due to come in on the 1st of April, so I don’t think we will see that going. The interesting thing is how does the Chancellor tip toes through that conundrum around the public opinion and the US position. His way out on this is hopefully through the OECD work, where the OECD are looking at trying to reach a consensus in international level, how the future international tax should run. Everybody would agree that is the right way forward rather than having lots of unilateral taxation.

Our thinking is the GST will stay in place for now, with an expectation maybe if we can get an agreement at an OECD level on the way forward by the end of the calendar year that might be a convenient time for the GST to get dropped for a new system.

Anna

What about the other half of that equation, the High Street, Gavin I don’t know whether you perhaps have a view on what could be done there?

Gavin

There is concern right across the political spectrum about the decline of High Streets. There are underlying trends in terms of all of our behavior as shoppers that are function of that, but I think fairly widely across the political spectrum there is also a view that the way that the business rate system works is making life more difficult than it need be for traditional retail. The question is, there is a lot of money that that system raises, and a lot of it helps fund local governments, so finding the right answer isn’t easy. My instinct is what you are likely to see in this budget is big picture announcement about a move to long-term replacement, but a consultation rather than a definitive solution, because this is complex and getting the answers right isn’t going to be easy. There may be an initial short-term measure to help High Street retail, in particular, as well as that long-term commitment to look at the whole business rate system and how you could replace it.

Anna

More consultations on business rates, you heard here first. Now we’ve spoken lot about Brexit in the last few years, and given that it is done, we don’t need to talk about it anymore, except of course we do, because there is still a lot to be ironed about our future relationship with the EU, as transitions come to an end at the end of this year.

Gavin, can you help us to paint a picture about what influence that 31st of December deadline will be having upon the Chancellor’s plans on March 11th?

Gavin

There will be two things that will be in the Chancellor’s mind. First of all, the government has been absolutely clear that it is not going to extend this transition period and that this is going to come an end on the 31st of December. One of the things that has been interesting since the election, is there has been a little bit more openness about the fact that the government’s decisions on the kind of Brexit it wants are going to mean friction at the UK-EU border and that there is going to be some economic cost to that. There has been some more openness about that. Clearly, the government doesn’t share some of the previous treasury forecast about the scale of that cost, but they are accepting there is going to be a one off cost. One thing that will be Chancellor’s mind is, what can he do with the other levers at his disposal to counteract that.

Then secondly, he will be looking at things that he can do in the tax base with the freedoms that we will have post 31st of December, because one of the things that prime minister was really clear about when he talked about these issues is, Brexit isn’t just a sort of problem to be managed, actually there are real opportunities that come from it. We should look in the budget for things that government is going to say that we are going to do this, and this is something we can only do because we’ve left European Union.

Jon

I think an example of that is the prime minister is very keen on free ports, which the centre piece talked about the election. I am not sure we are getting much more on that in the budget itself, because we’ve just had a consultation document released recently in February on the free ports. It is quite a long consultation, runs into April. We are unlikely to get much now in the budget, but we will certainly see more around that later in the year. Actually, it is obviously a flagship example of what we can do once we are outside the EU.

The other thing just to mention on customs is, it picks up on the cost points as well. There is another consultation out there at the moment around a simplification of the customs rules post the transition period. From the 1st of January, assume we do stick to that 31st December deadline, and that’s partly to make it a bit easier in totality around any customs duties coming on products from anywhere around the world. It simplifies it, slightly less cost, so it is a bit of balancing up in terms of the added complications that is going to come in terms of imports from the EU.

Anna

Lovely, thank you.

Now, if we leave the EU relationship for one, and think about, actually initially there has been a longer challenge for the UK economy which is that of productivity, and productivity has growing by just 2.9% over the last 11 years. Gavin, can anything be done in this budget to address the UK’s productivity challenge?

Gavin

I am sure there will be further attempts. As you said, this has been a problem that UK politics has been grappling with for a long time. If you like, it’s the flip side of one of our great success stories. If you look at the performance of our labor market over that kind of time period, it is almost been miraculous, the scale of job creation that we’ve seen here in the UK and the two are probably related. It is probably one of the causes of productivity growth being weak, is the significant extra number of people we’ve got into the labor market, but I think a really big change is coming, because again the government has been clear now on immigration policy, the free movement is coming to an end. Businesses are not going to be able to access that huge pool of labour that they were able to before, and that may incentivise them to take action in terms of investment in technology and in upskilling their workforce. The government may be thinking about what it can do to encourage that kind of investment, but it doesn’t have a silver bullet.

Anna

Already?

Gavin

But I think it is more of the same, they will be looking at transport infrastructure investment, skills, retraining, devolution, trying to give local political leaders more power, some combination of those things, and I think you will see further measures along those lines.

Jon

I couldn’t agree more, We are now at a point where there is a massive upskilling challenge to make sure we’ve got the population ready for the new world in terms of digital skills. From our own research, we know that only three-quarters of the UK workers would take the opportunity to better understand or use new technology if given the opportunity, but a much smaller proportion actually have that chance. Just picking up on Gavin saying there, I think this seems an opportunity for the government to really turbo charge that and do something maybe with the apprenticeship levy, that’s obviously there to encourage employees to invest in training, but maybe something a bit more tailored around incentivising and training the new world skills that we think everybody is going to need going forward.

Anna

Thank you both.

Climate changes, I guess is an increasingly hot topic pan attended, and we saw in this year’s PwC’s CEO survey that 64% of UK CEOs believe the climate change poses a threat to their business, in the year of Australian bush fires and floods across the UK. There is talk about environmental taxes, but Jon is there anything which system can do, how can we use tax to address climate challenges?

Jon

Well, there is a lot of momentum now in terms of reaching net-zero carbon in terms of popular demand from the population, but also I think this year is going to be a big year because we’ve got the COP 26 coming in November in Glasgow, which is going to be the biggest COP we’ve had since the Paris agreement number of years ago.

I do think if this is not the greenest budget yet, would be surprising. I don’t think everything will come out in this budget, because we do know HM treasury are doing their analysis, which they will release just ahead of the COP 26 in terms of the transition cost against net-zero, but you really think they are going to have to do something in terms of some indications around what those measures will be and releasing some of those in the budget.

The reality is taxes only going to be a small piece of this, it is going to be a combination of regulation, incentives, subsidies, and taxation, as well as some significant investment infrastructure. Infrastructure investment is definitely going to be a key part of and the key announcement. Of course, coming back to those fiscal rules, borrowing to invest is outside for the current. Spending, so it’s an easier route for the Chancellor to go.

On tax itself, there will be some opportunities there on tax. Small examples like changing the classification of charging electric vehicles to domestic, which will reduce the VAT rate for 20%.There are clearly some angles that the Chancellor can use to add to that package, but yes if this is not the greenest budget then I will be surprised.

Anna

Gavin, Jon mentioned COP 26 there, of course that creates a real moment this year where actually the UK government might want to demonstrate some of its success to date. Do you have a perspective on what we might see as a consequence of hosting of that later this year?

Gavin

If you are a government that is trying to prove that Britain can play a leadership role post Brexit, that day of hosting that confront is red circled on your calendar. Actually, that’s one of the reasons why, although I think we will see some things in this budget, it is not all going to go in the budget, because they are going to want a drum beat of announcements all the way through the year. You’ve already had an announcement in terms of the date at which they are going to phase out people being able to buy petrol or diesel or hybrid cars. But I thought the thing that you mentioned about the CEO survey is really interesting, because it shows actually the business leaders are very well aware of the consequences to their own business models of the way public policy is going to have to shift, but also increasingly under pressure from their own staff to take action in this area,

One of the message that government would want to get across is that actually business is part of the solution to this problem. Yes, the way we currently live our life is the cause of the problem, but actually you want, for example, that nearly almost we are going to have to replace the gas powered boilers in our homes, you are going to need private business to help you deliver those policy goal. The same is true of every single sector of the economy where this transformation is required. The government will be keen to work with business to deliver the changes necessary.

Anna

Gentlemen, thank you, we’ve covered an awful lot of ground there. If I try and summarise what I think is some of those main points, Gavin kicked us of by highlighting that as ever politics are as important in this budget as the economics, and in particular how the government is going to deliver for those new voters in the red wall seats across the North and the midlands.

Still a bit of a question mark about how they are going to square the circle between increased spending and protecting the fiscal rule if they choose to do so, is that through broadening the base, is it through relieves of which there are many. Although, Brexit is done, we still need to work out what the impact is at the end of the transitions with free ports, with direct taxes, indirect taxes, still to play there.

On productivity and environment, two huge issues, for neither of which there is a single silver bullet, but clearly the role of organisations like ours and hopefully those listening, will have a big role to play, both in terms of up scaling their people, but also on delivering against net zero, but of course this might not be the only fiscal event that we get this year. We might have a reason to get back around the table later in 2020 with IFS and other suggesting that is where the spending review that will take place this year. We might also have an autumn budget falling back in the normal rhythm of the fiscal cycle.

Plenty of things to keep an eye on over 2020.

Thank you Jon and Gavin for talking us through those.

For our listeners, don’t forget to subscribe to our Talking Tax Podcast and to follow up budget updates online on March 11th.

Thank you very much.

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