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For this annual event, the Chancellor provides an update the state of the UK economy and recent forecasts, spending plans, and estimates of how much the government will need to borrow. It is also an opportunity for announcements on changes to the UK tax system.
There has already been some speculation about certain tax announcements given that tax receipts have been strong this year resulting government borrowing for 2023/24 being lower than originally forecast. This perhaps would allow the Chancellor to make selective tax cuts going into next year – which is likely to be an election year. There are however some headwinds facing the Chancellor with public pay settlements likely to increase spending next year and thereafter, the higher cost of financing government debt due to higher interest rates and challenges
Rather than comment on, or add to, this speculation, I am going to outline the issues that I would like to see the Chancellor cover in his statement.
Firstly, in respect of taxation I would like the Chancellor to address the freezing of the basic rate band up until 2025/26 and the clawback of child benefit. The current rules are resulting in higher tax receipts for the government as more people pay income tax at the higher 40% rate of income tax, particularly due to pay rises provided by employers seeking to help staff manage current cost of living pressures. Included in this are employees on middle manager wages (c£50,000). Many of these employees, if they have children, are also having to deal with the clawback of child benefit which can create marginal income tax rates of c60% plus. I would like to see the Chancellor provide some relief for taxpayers at this level with the removal of the provisions to clawback child benefit (or have it apply at much higher levels of income) and restart the indexation of the basic rate band for income tax.
Whilst the income tax personal allowance is also frozen until 2025/26 and will increase the number of taxpayers in the UK, it was made significantly more generous by the government from 2011/12 onwards – it increased by amounts significantly in excess of annual inflation from £7,475 in 2011/12 to £12,500 in 2019/20. There were concerns at the time that by increasing the personal allowance so significantly the government was reducing the UK tax base. By freezing the personal allowance from 2021 to 2026, the government is again having to widen the tax base to improve annual tax receipts.
Another area of taxation that I would like to see the Chancellor acting upon would be to announce that full expensing of capital expenditure for tax purposes, allowing companies to secure an immediate tax benefit from investment, would be made permanent. In the March budget the Chancellor introduced full expensing but only for the next three years and made a statement that his ambition would be for it to be made permanent. This could provide certainty and confidence to business to make important investment plans, something would be of long term benefit to the UK economy and productivity.
Looking beyond taxation measures I would like to see the Chancellor commission the development of a comprehensive plan for delivering sustainable growth for the UK economy over the medium to long term. It is not helpful that next year is an election year and it would have been better if the government had started work on this earlier. But that is no reason to delay. In January of this year, the Chancellor outlined a vision for encouraging further investment in five key growth sectors which are Digital Technology, Green Industries, Life Sciences, Advanced Manufacturing and Creative Industries.
What is required is a comprehensive and ambitious plan for the growth of these sectors, with a commitment that future government policy across all departments will be aligned to this plan with opportunities for innovation identified and prioritised. Areas of focus could include linking the NHS and its data with the Life Sciences sector and using digital technology to deliver public services more efficiently.
Crucial to this will be investment in skills development, both in traditional sectors and in sectors which are new and developing (data analytics, process automation, artificial intelligence, etc). This is an issue for the whole UK economy and a particular issue for Northern Ireland where there are far too many people leave education with no skills or qualifications. What is needed is a package of measures including funding and other support to enable employers to source and deliver skills development.
A clear statement from the Chancellor now about developing concrete plans for the future sustainable growth of the UK economy will provide much needed direction and confidence to business and providers of capital, both in the UK and internationally.
It will be interesting to see what the Chancellor actually announces tomorrow and check back to see whether any of the above points are properly dealt with. The track record of Chancellors in the UK in delivering measures to support long term development or tax fairness is however not encouraging.