Transcript for: Talking Tax - Episode 2: Are tax rises inevitable this Autumn Budget?

Barry Murphy [Chair]

Hello, welcome! I am Barry Murphy from PwC, and welcome to this Talking Tax Podcast where we are going through discussions on some of the big and thorny issues in tax today.

Today’s discussion is about Budget 2017. Is it going to be ridden with clichés about a Chancellor between a rock and a hard place; about how he grows the cake; who gets to share the cake; or actually is it going to be a little bit of a forward progression on what we talked about in a previous podcast on better budgets; is he going to plant some trees for the future, what are we going to find?

First of all Anna, if I come to you, it’s the first budget since the general election. We’ve got Brexit high on the horizon, so we do, and it’s the first one where Chancellor Hammond has moved it to the Autumn Budget, rather than the previous cycle.  What kind of pressure is he going to be under and what do you think he has to deliver?

I am joined today to discuss the topic by Anna Wallace, our Head of Politics and Stella Amiss, our Head of Tax Policy here at PwC. Anna, Stella, thank you!

Anna Wallace

Well, absolutely and to add on to another one of those, sort of, clichés that you just listed there, Barry, I think he is on a tight rope.  He is in a very difficult position and normally this type of budget, so the first one after general election, is probably the time when you get out some of the difficult decisions, when you try and get across some tax rises that hopefully the electorate will have forgotten about by the time you get to the next election.  But, of course, the parliamentary arithmetic this time, and the fact that he is now in a minority government, make that a little bit more difficult than usual. We know that he is in exceptional circumstances anyway, and actually casting our mind back to the March budget pre-election, when the government was still in the majority position, he already found it difficult to do some hard things, like increases for self-employed people. So, he is going to be under even more pressure this time to do anything bold, I think.

Barry Murphy [Chair]

Okay.  So, even more pressure to do anything bold.  There would be some, who say, come on, cut us a bit of slack, austerity, we’ve had enough. Is he going to really stick to his guns and keep focussed on that 2020 deficit target?

Anna Wallace

Well, undoubtedly he is under pressure to loosen the reins, so to speak, on the deficit reduction plans, and there are these some big, big, sort of, non-Brexit policy issues that have been applying that pressure.  So, things like, will he reverse, or demands for him to reverse the 12 billion pounds welfare cuts that Osborne made a couple of years ago; pressure around public sector pay; let alone the contingencies that he needs to put aside for Brexit arrangement.

But having said that, I think this is a, you know, small 'c' fiscally conservative, fiscally prudent Chancellor, who will want to put across a message of reassurance for the market, not a, sort of, big, splashy, rabbit out of the hat type announcement.  So, yes, there is some public pressure and that is the tight rope that he has got to tread, between responding to public demands for loosening of austerity, but still remaining, sort of, true to his deficit reduction plans and resisting pushing out that time table further.

Barry Murphy [Chair]

So, a conservative prudent Chancellor, but you are all about politics.  If, you are advising him, what does the public really want? Will they really prefer that he raises some taxes and spends it, or will they prefer he does more deficit?  What do you think would play to the public right now?

Anna Wallace

Well, I think opinion polls have showed that sometimes people, actually increasingly people accept that, for example, to fund better pay for nurses, they might accept higher tax rises, but that is obviously always easier said than done.  Actually when the rubber hits the road, and you do the calculations and work out which part of the electorate is going to suffer, that is where it becomes difficult and that’s what happened to him back in March, you know. Doing something that I think we as a firm would support in terms of the simplification, around self-employed versus employed, but still politically very, very difficult to deliver in practice.

Barry Murphy [Chair]

Okay, so there is always winners and losers, how will the cookie crumble?

Anna Wallace

Always winners and losers

Barry Murphy [Chair]

Stella, coming to you now, you are the Tax Policy Expert, we have heard a bit about the political angle.  What do you think he is going to do?

Stella Amiss

Well, as Anna has painted the picture, I think this budget could be truly fascinating, because it is really difficult to judge which way he is going to go.  If you look at the tactics deployed by his predecessor, George Osborne, Osborne used to always try to take the wind out of sails of the opposition parties, try to get there before they could get the momentum going.  So, this Chancellor could try and do that. But as Anna has articulated already, that’s really difficult to do, and to a degree he tried to do that with the change to the self-employed, tried to address some of those issues, and that, kind of, failed dismally as we all saw.

So, I think, if he is going to do it, he could try and get some buy in, and try and do it a little bit at a time, maybe.  Try and make a few changes that could make a real impact, but I think, as Anna said, that’s quite difficult to do.  I think, he will struggle to get the support of his own party and they are in a very fragile position. So, I suspect, that he will try and do a lot of blustering, there will be a lot of big noises, but probably very little in there.

Barry Murphy [Chair]

Well, so blustering, maybe not a lot in there, that could be true.  Particularly, if he is trying to go that path down the middle on a very big tight roped at the moment, I can get that, but let’s look at both sides of the equation. Let’s look at, maybe, if he want to do, where he could raise some taxes, before we come on to, where he could spend some money.  Stella, if I come to you first, what might that look like, if he wants to raise taxes, where do you think he would go first?

Stella Amiss

Well, there is different ways the Chancellor could approach this. I suspect, that he will not want any great big headlines about big increases in taxes.  For all the reasons that Anna has articulated there earlier, it would be really difficult to get them through, and I am sure that for every one person that will be supportive of a tax raise, there will be 25 others arguing against it, and they will want to avoid all of that in the current environment.

So, instead they could look to try and raise revenues in different ways. You know, things we’ve called stealth taxes in the past. There is different ways they could do that. They could introduce levies. Levies aren’t taxes, but we know that they are. They are taxes by another name, but it is a way of raising revenue without a big headline tax increase that will be splashed over the pages the next day.

The other way they could try and have a go is to fix allowances. So, if they fix allowances where all the other costs go up, in real terms, that is effectively a tax rise, because you don’t get the allowances, or the tax relief you might be expecting, but all your other costs and potentially the revenues that you are earning go up, but you get less of a tax break. So, you don’t, again, you don’t get a big headline that the tax rates gone up, and there is no big change overnight, but in effect, a few months later you would be feeling the pinch and be paying more tax than you might have been before the budget. So, again, I think, there are couple of ways he could do that.

The other thing he could do is, try and remove reliefs that people get against their tax bills.  Now, we do not see that so often. I think, the last example I could think of, was things like the mortgage rate relief. You know, we used to get relief for mortgage payments, and we do not anymore, and I think partly that’s because many of those reliefs have been taken away already. So, I think, if he is going to try and do it, I think, he will want to avoid the big headlines, and ways of doing that is to raise levies rather than taxes and potentially look at the allowances that are given and try and attack it that way.

Barry Murphy [Chair]

Okay.  So, if I was, maybe, listening to the budget, then is watching out for what seems innocuous, but that there is an undercurrent of, this is going to cost you money, if I am the tax payer.

Stella Amiss

Exactly right

Barry Murphy [Chair]

But, Anna, what is the political mood like at the moment.  I think that is going to get called out if there are stealth taxes.

Anna Wallace

Well, absolutely!  You know, of course, nowadays in this, sort of, modern era, stealth taxes don’t stay stealth for very long, because you have very smart people like the IFS, and you and Stella, who call these things out in the public media, and as Stella already alluded, you know, this is a Chancellor, who needs to maintain the confidence, both of the public and of the house, and even though, post general election is normally the time when you make those difficult decisions.  Again, just to really, sort of, highlight this point, the parliamentary arithmetic make it very difficult for him to do anything that is going to punish any single part of the electorate. I agree with Stella, I think, what he will be looking for, is a, sort of, the piecemeal, if I can use that, not in a derogatory way, but a piecemeal and progressive budget, that he knows will secure the support of the house, and in particular the general public.  That’s his challenge, that’s the tight rope that he has got to walk.

Barry Murphy [Chair]

Okay, and walking that tight rope, if stealth taxes could lead to that type of explosion, Stella, what else could he do that might not be as politically unpopular?

Stella Amiss

The other thing he could do, is, he can target particular parts of the sector, to kind of, make a bigger contribution to the tax pot than they already do.  Again, this is a tactic deployed by governments.  In the past we have seen the oil industry very heavily taxed and that was, kind of, making lots of money and more recently we have seen the banks, kind of, be penalised by very high tax rates and bank levies as well.  So, we could target a particular sector.  One obvious target that we have seen lots about in the press is the digital economy.  You know, we know that EU are looking at that and other parties, that’s one area he may feel, he will get broad consensus support for changing the way that it is taxed than to where it is currently.

Barry Murphy [Chair]

Are there any other major areas he might consider, you know, maybe to either of you, have heard about VAT thresholds, some bigger headline, may be that’s just going to be too difficult for all the reasons you’ve outlined, but do you think any of that type of thing is on the cards at this time?

Anna Wallace

I mean as we’ve already alluded,  I don’t think Chancellor Hammond is a  rabbit out of the hat type chancellor, I think the biggest gimmick that he had in his March budget was about a pot of money for a decrepit manor house somewhere in the English countryside, so I think that it would be a much more steady as you go, reassuring the markets about the health of the UK economy in the context of Brexit, and I think that there will probably if he goes more radical it will be probably in the area of social policy, so perhaps building on the announcements while the industrial strategy which will just come out couple of weeks before, building on the announcements of the conference around tuition fees and housing,  so I think it would be more in the sort of reliefs as  you said  for certain parts of the electoral rather than anything big and shiny.

Barry Murphy [Chair]

Okay and that’s social policy dimension which might be no harm, but no discussion would be complete maybe at the moment, without some mention of the US and recent US tax reform, tax on business, Stella should we look out for anything in particular there?

Stella Amiss

Yeah!  Again there has been some speculation, as to whether it’s right and the current environment going back to the comments you were making Barry earlier about austerity kind of measures, to reduce the corporation tax rate, here in the UK down to 17 % which has been focused on for quite some years now. There are calls that maybe he should unwind that or slow that down at least and as you say we saw that the US have announced their measures, they are going to go to a low tax rate of 20%, so personally I think it would send a very negative signal for this Chancellor to therefore start unwinding the approach that he has adopted which is consistent with what we are seeing internationally.

I also think that would send a very negative signal to outsiders looking to invest into the UK so and again for all the reasons that Anna has said, I would be really surprised if this particular Chancellor decided to make any changes to that programme.

Barry Murphy [Chair]

Okay, so steady as she goes there as well. I am getting a theme, a lot of sound and fury, maybe on the budget day, but actually are there any other areas where he is going to get a lot of pressure to appeal to any particular parts of the electorate, if he is going to give a giveaway, is there anything else that we haven’t covered up, where you would say that’s where he is going to have the most pressure?

Stella Amiss

I mean I would say the one area that always comes up and we have seen over the last few years is around anti avoidance. You know just last week we saw measures whether the revenue have published their numbers  on the tax gap and there is  still 1.7 billion of tax gap attributed to tax avoidance and now that number is going down and is actually much smaller than some of the other numbers but it is a theme that we know opposition parties will keep pushing on and I think that the government have to keep responding too, now again personally they have introduced a raft of measures over the last few years, I think those should be allowed to bed down. We have got another one coming in the next couple of months and we still have not seen how that is going to work,  so rather than deploying resources against that, the government could stand back and say, "Hey there is about 8 billion of the tax gap attributable to errors and mistakes and 5 billion to evasion, why don’t we put some more money into the resources to try and address those parts of the tax gap and try to make sure that the ones we have already got in place are working for tax avoidance.”

Barry Murphy [Chair]

But Anna, on avoidance, evasion in particular looks like the political alignment is absolutely not going to slow down on those measures despite Stella’s best advice, would you agree?

Anna Wallace

Absolutely, it feels like every election we almost get in to these sort of one upmanship about exactly how much money each party is going to save on these measures, sort of a question mark about actually you know validity of some of those numbers, but suffice to say is going to remain in the political spotlight and in many cases rightly so, this isn’t going to be something that you know is suddenly going to drop off the political agenda any time as soon I suspect.

Barry Murphy [Chair]

Okay so quite a lot to watch but there might be not a lot that happens on the Budget day, may be just before we close with a key ask from each of you. Stella, actually does the budget matter that much then, who is paying attention?

Stella Amiss

Well for businesses and for people individually, I mean people do watch out, individual tax payers, desperately look and see what happens to their tax rate, how much is going to affect the amount of money they  take  home, how much extra is a pint of beer going to cost, those are the kind of immediate headlines we get out of the budget, for business, I think they watch a budget and they’re interested in it because it sets a tone, we don’t quite know what does it means for business until we start getting the details and that often comes sometime later,  but it does send the signal of the direction of travel, the policy intent and what it is going to mean for the broader business environment over the next kind of couple of years,  as the measures bed in. So it is important, but not necessarily kind of ground breaking on the day itself.

Barry Murphy [Chair]

And hence may be no harm that he is not pulling the rabbits out of the hat then because it is about the strategic direction that we should always watch.

Stella Amiss

I mean rabbits are a bad thing you know because rabbits often demonstrate a lack of policy, lack of strategy and bit of a knee-jerk reaction which makes everybody have to react differently, so rabbits are never a welcome thing.

Barry Murphy [Chair]

Okay! So if there was one key ask, very specific ask, for each of you that you would have in this budget what it would be Anna?

Anna Wallace

Well I think just step back and just consider this budget in the wider context for a moment, so I think this is going to be the first budget not just in the new cycle, but it’s going to be the first one where Brexit features substantially in the book, actually there wasn’t really lot of in March apart from we know it’s coming, we know that it might impact our growth figures and is going to feature substantially in the book and this is the moment where the Chancellor needs to determine the new direction of the UK economy outside of the EU.

This is where alongside the industrial strategy and all the bills that will be presented before the house before Christmas, we determine our future and the future economy, the future shape of the economy, what type of business do we want to attract, what the environment for businesses is going to be like? So I want to see not rabbits, but a strategic direction.

Barry Murphy [Chair]

So a billboard of Brexit direction.

Anna Wallace

Exactly, where do we want to be as a nation in 5 years’ time?

Barry Murphy [Chair]

Great ask, Stella?

Stella Amiss

I completely endorse what Anna has just said, as we have said for a long time we want much more clarity around the strategy and the policy and that direction helps enormously and the other area I think goes back to one of the points that Anna was making,  I would like to see this government kind of start living up to some of the promises they are making, so I think echoing what Anna was saying about the conservative party conference and the comments that were made about the housing, so trying to address some of those issues like intergenerational fairness, I think housing will be a key policy to start making some inroads on.

Anna Wallace

Absolutely

Barry Murphy [Chair]

Anna, Stella thanks very much for that, thank you for listening and do join us on Budget Day when we will be able to see if the government has followed some of the strong recommendations from Stella and Anna and I know they will be keeping a watchful eye and letting you know what’s happened and if the government has done what it should do, thanks for listening.

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