The chancellor has set out a vision to grow the economy by identifying five growth sectors: Digital Technology, Green Industries, Life Sciences, Advanced Manufacturing and Creative Industries, and ‘four Es’ to achieve it: enterprise, education, employment and everywhere.
But dig beneath the buzz words and there is precious little that looks like a holistic approach for growth. What is emerging is a picture of a government that doesn’t quite know where to focus its energies.
Higher taxes for business
Recent fiscal events have imposed significant tax increases on businesses; the increase in corporation tax is expected to raise an additional £83billion in the period to 2027/28, the windfall taxes on oil and gas producers and electricity generators is expected to raise £55 billion over the same period, and the freezing of the employer’s NI thresholds, £25 billion.
Good news for businesses has been thin on the ground. The most notable was the introduction of full-expensing in this year’s Spring Budget which, as the UK has been under-generous on capex historically, was a welcome step in the right direction. It was announced late in the day and businesses had little time to prepare. The policy is also temporary, running to March 2026, but businesses don’t make short term decisions about the deployment of capital. They want certainty over the long term.
Searching for a tax strategy
There are calls from the right of the conservative party to cut taxes to generate growth. This was a strategy pursued by Liz Truss in her short-lived premiership but it backfired quickly. As a result, the policy wasn’t really tested or given a chance to succeed (or fail) on its own merits.
The problem with harking back to Thatcherism is that the country faces very different challenges now. We have different priorities; Net Zero, an aging population, intergenerational unfairness, levelling up etc.
We are in a period of high tax but that is arguably the least bad option for Rishi Sunak. Paul Johnson from the Institute for Fiscal Studies wrote in May 2023; “The judgement is this. The rising tax burden is the least bad of three options. The two others are further deep cuts in public spending or more borrowing, putting public debt on an ever-upwards path.”
For business, the UK seems to have moved broadly from a “low tax / broad base” orthodoxy to a new “higher rate / picking winners” philosophy. If tax policy is to pivot in this way, then the onus is on the government to articulate what reliefs are available, whom they are intended to benefit, and how they are intended to be used. It is sometimes hard to see who those winners are.
This comes into sharper focus when we look at some international developments. The US has been bold with their Inflation Reduction Act (IRA) which includes generous tax support for energy transition. The EU is responding with a European Green Deal which promises to water down state aid rules to enable the bloc to compete for green technology. The UK should be in this race but to respond well needs a big gesture.
For private businesses the UK tax environment is relatively benign. Personal capital gains tax is relatively low, succession taxes for private trading businesses are zero and we don’t have wealth taxes. But the reliefs we have often don’t support scale-ups. It is difficult for private business owners to realise value without selling to a third party. We need reliefs that keep business growing not incentivising their owners to sell.
To use tax policy as a trigger for growth, the government needs to understand what it is spending money on and why. There needs to be a fully-fledged strategy and the government needs to be prepared to go in with both feet.
Increasingly, eyes are turning to the general election in 2024.
Already we are seeing investment decisions stalling, with businesses increasingly wanting to know the outcome of the election and the impact that will have on tax policy before committing to the UK.
Labour, as the opposition party, are beginning to set out their stall but most statements have been on personal taxes; the non-dom regime, pension lifetime and annual allowances, the taxation of carry for private equity, and VAT on school fees to name some.
Labour have been more muted on business tax measures. Keen to be seen as business friendly, their approach has been to promise systemic reviews in areas such as business taxes, the apprenticeship levy and business rates, although they have said they will extend windfall taxes on energy companies.
As for the Conservatives, we can expect the Autumn Statement to be mostly focussed on business measures. The Chancellor is likely to save personal tax give-aways until Spring Budget 2024. I would expect announcements in areas such as R&D and creative sector reliefs, tax incentives to improve employee health (and so get more people back to work) and Investment Zones. Businesses will hope that full-expensing will be made permanent but, overall, my sense is that it will be ‘more of the same’ rather than a big ‘all-in’ strategy for growth.
What is clear is that there is no silver bullet to resolve the economy’s ills. We are still recovering from the pandemic and the high national debt levels that were imposed on us. But we are a nation that wants American taxes but a European welfare system and the two don’t sit well together. As Paul Johnson said; “Pay no heed to those who claim we could raise an additional £100 billion or more a year from the ultra-wealthy or from multinational corporations. We couldn’t.”
So, what can business expect over the next fourteen months?
It is beginning to look like the election will be fought primarily on personal taxes. The election may have a tactical impact on business tax policy rather than a strategic impact, even if there is a change of government.
A longer-term direction of travel towards incentivising capex, maintaining and enhancing R&D credits and picking winners with a bigger emphasis on green seems set to continue.
Ideally we would see a bold response to the US IRA. We can’t afford anything as big, but are we really doing all we can to make sure we don’t see a drain of green tech business to the US (or the EU)?
In the meantime, I would like to see the main parties working together to encourage a stable and growth-focussed environment for business despite, or perhaps because of, the election.
The UK is a great place to live and do business. It is a country that offers great opportunities for investment, but we need to bang our own drum more. Cross-party agreement on some core aspects of fiscal policy, such as priority sectors or industries, would allow multinationals and private companies alike to make better decisions in relation to UK investment.