With less than two weeks remaining until the Autumn Statement, Gus Williams, CEO at Bevan Buckland, looks ahead to the announcement on October 30th. He analyses the options available to the Chancellor and highlights the key areas that the Government could prioritise.
Growing up with the budgets of Howe, Lawson and Lomont, it’s hard not to feel a sense of decline in one of the great offices of state. Even Gordon Brown, whose mistakes arguably set us on the path to where we are today, brought significant political weight and identity to the role.
I suspect you could paraphrase all budget meetings over the last decade along the lines of:
Chancellor: “Why don’t we do this? I read it in a book somewhere?”
Special Advisor:” Excellent idea Chancellor”
Treasury Official: “It’s Impractical and won’t work”
OBR: “Hmm, we need more specifics.”
Chancellor: “Ok, let’s just announce some stuff that will never actually happen, freeze personal allowances, figure out some little tax cut I can finish with and then get back here for the drinks party.”
Will the first Labour budget at the end of the month be any different?
This Labour Government got to office by walking a fine line politically. That strategy ultimately worked, but now that they are in office, it has left them exposed without a clear political identity for the electorate to get behind. They may argue they have five years and will be judged on their achievements, but this first budget is an opportunity for them to set out a clearer vision of how they will govern and regain the lost narrative.
The problem is they are running up against the same old issues – how to improve public services and ignite economic growth when the cupboard is bare. The Conservatives undoubtedly kicked the can down the road when it came to the public finances. Austerity as a policy was disastrous – although it did bring austerity to the country – and chancellors have been treading water since.
I think it’s a given that Rachel Reeves will change the rules to allow borrowing to invest in infrastructure that can stimulate growth. This isn’t anything new and is actually a welcome throwback to traditional Keynesian economics. It is hard to see how the economy will grow without increased public investment. The key question here is, what do you invest in that will stimulate growth when so much money is needed just to patch things up? I would be surprised if we don’t get a few announcements on shiny new projects; being biased, I hope that the Swansea Metro is on that list.
The Government has made it clear that taxes need to rise. There’s a chance all this doom and gloom is just a ruse, and not much will happen, but I’d be surprised. We’ve had the usual rash of stories in the press, testing the water to see the public reaction. We seem to be landing on bringing pension contributions into scope for Employers NI. This highlights the Chancellor’s main dilemma: tinkering around with peripheral taxes might raise the odd billion here or there, but it may not. The only way you can effectively raise taxes instantly is through payroll taxes or VAT. Having ruled out direct changes to these, they are looking for a backdoor way in. The problem with changes to things like CGT and inheritance tax is that they might not have the immediate impact the Chancellor needs and leave a hole. I do think we will see changes to inheritance tax at some point, probably reducing the rate but bringing more people into scope, but maybe not this budget, given the furore over the Winter Fuel Allowance.
We may see the CGT allowance disappear entirely or be replaced by a new low threshold on capital gains, similar to the threshold on interest income. However, this may not bring in much immediate revenue as the CGT allowance is often used to reduce tax liabilities.
The noise of increasing CGT rates has dampened down. I do think this Government will try to even up effective tax rates between PAYE and income from capital gains, but I’m not sure they’ve figured out how best to do this yet.
Increasing taxation on those with large pension pots is another option they are considering. This would most likely reduce the amount of tax-free drawdown, but again, while it may gradually increase the tax take over the long term, it might not do much in the short term.
This is why all roads lead back to the increase in employers’ NI.
This is obviously going to put further pressure on profit margins for small businesses, which will have to come out in the wash somewhere.
This all brings us back to the need for Labour to establish a political identity that people can get behind. This budget alone is not going to fix the economic and fiscal problems we face. To allow the Government to do anything over the next five years, it will need greater public support, and that is the real measure of whether this budget will be considered a success or not – will it garner public support for the long-term changes needed? To really fix things, they need the support of those who have actually done well economically over the last few decades, and to do that, they need to drive the narrative that increased taxes will actually make a difference to public services and can foster private sector growth. A tall order that no politician seems to be brave enough to take on
The most important piece of legislation on which we could be given more detail on October 30th are changes to the planning process. I think the Government would like this to be front and centre of how they will fix things. Tinkering with the tax numbers is one thing; breaking down the underlying barriers to growth is going to be the real challenge.
