A new fiscal framework, by Philip Hammond

21 Feb 08
The Labour government's U-turns on fiscal change have left Britain with high, complicated taxes in an uncertain climate, says shadow chief secretary to the Treasury Philip Hammond. He argues that there is an alternative

22 February 2008

The Labour government's U-turns on fiscal change have left Britain with high, complicated taxes in an uncertain climate, says shadow chief secretary to the Treasury Philip Hammond. He argues that there is an alternative

The period since the Pre-Budget Report in October has been dominated by the controversy surrounding Alistair Darling's proposals on non-domicile residents and capital gains tax for business entrepreneurs – and the reaction of the business community and tax experts to them.

Now that the chancellor has partially climbed down on both, it is time to focus on the longer-term damage that these proposals have done to Britain's reputation as a mature, stable and attractive place to do business.

We are now less than two months away from April 6, when both of these changes are due to come into force. Yet we still do not know what the non-dom regime will look like in detail. And businesses have only recently found out the final form (we think) of the capital gains tax regime.

These are not just problems for the individuals and companies involved. The past four months have been hugely damaging to Britain's reputation as a place to do business, a reputation already reeling from the effects of the run on Northern Rock, and now the announcement that it is to be nationalised.

This is no way to go about tax reform. This succession of hasty announcements, climbdowns, confrontations and U-turns delivers the opposite of the stable environment that businesses and individuals need.

These U-turns are not just a feature of Darling's tenure. Each recent Finance Bill has contained measures to close loopholes or reverse incentives created in its predecessors.

In March 2004, then-chancellor Gordon Brown closed a tax loophole for self-employed people that he had created only two years previously.

In 2003 Brown announced that residential property would be permitted in self-invested pension plans. While the pensions industry spent millions of pounds gearing up for the change and many individuals set about rearranging their retirement plans, the government rejected advice that their proposals would be a disaster. Yet at the eleventh hour, the decision was reversed, leaving tens of thousands of businesses and taxpayers to pick up the bill.

The CGT taper relief regime has fared only slightly better, lasting nine years before being consigned to the scrapheap.

This lack of direction smacks of political and fiscal opportunism and the absence of any coherent underlying philosophy. British taxpayers and those investing billions of pounds in our economy deserve better.

We must never forget that in the globalising economy of the twenty-first century, businesses and skilled individuals have a choice about where to locate and where to pay their taxes.

Britain cannot win this contest by offering the lowest tax rates when faced with competition from emerging economies with a less developed social infrastructure – to try to do so would put at risk the high-quality public services to which the British people are rightly attached.

But, traditionally, the advantage to the taxpayer of a higher-tax, mature jurisdiction has been greater certainty, stability and transparency in the fiscal process. If Britain is to attract businesses and high-earners in the future while operating a higher-cost tax regime than many emerging economies, we must offer stability and certainty.

But we should be under no illusion that a combination of higher tax levels and the kind of capricious tax decision-making we have seen over the past few months will quickly relegate UK Plc to the sidelines of this competition.

By 2007 Brown's decade in the Treasury left Britain with taxes that were both too high and too complicated. We have the longest tax code of any major economy and it's expanding the fastest. As the government is buffeted by short-term political events and budget deficits, it is changing and complicating the tax system in response.

The objective of a simpler, fairer, more competitive tax system has been sacrificed to the Treasury's hunger for cash and instinct to micro-manage. Time after time announcements billed as 'simplification', or 'in the interest of fairness' turn out to be tax grabs.

Time after time, the rhetoric of the Budget speech is at odds with the reality revealed by analysis of the small print. There is no sense of strategy or direction.

And there is a cost to all of this: uncertainty imposes a burden on business as surely as taxes do. But taxes at least benefit the Treasury. Uncertainty and complexity reduce competitiveness with no offsetting benefits at all.

There is a better way. Britain's two-stage budgeting process should be used as an opportunity to bring stability and certainty to the tax system. The Pre-Budget Report could be used to signal the outcomes to be achieved in the following Budget, as well as the broad objectives for the year following that.

The period from October to March could then be spent in genuine consultation about how to achieve the desired outcomes without damaging Britain's competitiveness rather than, as this year, a public spat, followed by a climbdown.

It surely makes sense to have business leaders, parliamentarians and tax experts working with the Treasury to get the detail right within the chancellor's framework of outcomes.

We in the Conservative Party have set up a working group, led by our former chancellor Geoffrey Howe, to look at options for improving the scrutiny of Budget proposals, and to look at plans for a new Office of Tax Simplification.

We have been clear about our priorities for reform of the tax system: simplification of business taxes with fewer exemptions and allowances paying for lower rates; support for families with children and a shift in the burden of personal taxes away from hard work and thrift and on to pollution. Any additional revenues from such taxes will be put into an independently audited family fund that will be used only to pay for reductions in taxes on families.

Working within this framework, we will announce areas of proposed changes well in advance of their implementation and listen to the advice of experts during the consultation process to ensure that they are well thought-through and fit for purpose.

In the medium term, our objective would be to lower rates by broadening the tax base. The aim of reform should be to get rid of special treatment, in favour of broad-based, simple, affordable taxes.

That is exactly the opposite of what Brown did – his ten years as chancellor saw endless U-turns on tax, concessions to favoured industries, complicated relief provisions – and the inevitable consequence: thousands of pages of complex anti-avoidance measures.

The end result is that Britain has a tax system that is more complex and distorting and less competitive than many of the major nations with which we must compete to survive.

So, in Darling's first (and perhaps only) Budget speech let's hear a clear apology for the shambles that has passed for UK fiscal policy over the past few months and the damage it has done to Britain's reputation as a place to do business.

Let's have a commitment to do things better. Let's hear a plan for a medium-term strategy that delivers certainty and clarity to taxpayers, investors and their advisers. Let us have a promise that short-term political expediency will no longer determine tax announcements with long-term consequences for Britain's future prosperity, as in the case of taxes on entrepreneurs and non-doms in October's Pre-Budget Report.

A reputation for fiscal stability and business-friendliness is hard won over a long period. It can be blown away in a 30-minute statement to Parliament, as we saw on October 9.

As Britain faces the challenges of a global economic slowdown and a shift in the balance of economic power from the established industrial nations to the emerging economies, we can ill-afford such profligacy with our pro-business credentials.

The process of rebuilding confidence in the UK's fiscal process will be a slow and painful one. It had better start on March 12.

Philip Hammond is shadow chief secretary to the Treasury. He will be taking part in the Public Finance/Deloitte pre-Budget round table debate on February 27


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