Debate: Better Budgets – have we succeeded in making tax policy better?

Speaking at an event held by the CIOT, the Institute for Government (IfG) and the Institute for Fiscal Studies (IFS), a panel of tax experts said while some of the report’s recommendations had been taken on board, there were still concerns over the complexity of the tax system and the lack of effective consultation and scrutiny.

The event, held on Monday 6 March 2023 at the IfG, was chaired by Gemma Tetlow, Chief Economist at the IfG, and featured speakers:

• Bill Dodwell, Outgoing Tax Director at the Office of Tax Simplification and former CIOT President
• Paul Johnson, Director of the Institute for Fiscal Studies
• Jill Rutter, Senior Fellow at the Institute for Government
• Sir Edward Troup, Tax and Tax Policy Commentator and former HMRC Permanent Secretary

The first three were among the authors of the Better Budgets report, which was published by CIOT, the IfG and IFS in 2017. Based on extensive interviews with tax policy stakeholders, it concluded that the tax policy making process was not fit for purpose and that – to reduce taxpayer confusion, cut down costly errors and avoid embarrassing U-turns – the government must change the way it makes tax and budget decisions.

It suggested 10 steps to creating better budgets:

1. Stick to the commitment to a single principal annual fiscal event and cut down Budget measure proliferation
2. Establish clear guiding principles and priorities for tax policy
3. Extend the road-map approach
4. Start consultation at an earlier stage
5. Develop more active approaches to consultation
6. Prepare the ground for future reform – and engage the public
7. Address the perceived capability gap around tax policy making
8. Overhaul internal processes
9. Enhance Parliament’s (and the public’s) ability to scrutinise tax proposals
10. Institutionalise and enable evaluations of tax measures

Welcoming guests to the debate, CIOT chief executive Helen Whiteman said: “This topic is very close to our hearts. The origins of the Better Budgets report were in an event the CIOT organised with IFS back in 2015... All the speakers had critiques of the tax policy process from different perspectives and of course had their share of differences. But there were some unmistakable common threads. At the heart of some of these was the idea that when it came to tax policy, governments should try to do less but do it better, and that was the start of the Better Budgets project.”

Fiscal events and tax proliferation

Opening the debate, Rutter said former Chancellor Phillip Hammond’s commitment to holding just one fiscal event a year was the first “big win” from the report, but that has since fallen away under his successors. She said: “I think now we’re pleased if we have a single fiscal event a month rather than a year!”

Rutter added that tax measures have continued to proliferate in recent years. However, she conceded that some of these were as a result of the “unprecedented problems” caused by COVID and the energy shock.

Dodwell agreed on the exceptional nature of some of the measures, saying: “Handing out money on COVID, you call it a fiscal event but there’s not much law that comes from it.”

Develop more active approaches to consultation

Rutter said more needs to be done around consultation on tax issues, adding that it was “not clear how welcome internal challenge is.”

She said: “We wouldn’t say the scrutiny of Finance Bills has improved but the Treasury select committee is engaging a bit more on tax.” She also called for both main parties to focus on tax reform rather than rates.

Dodwell agreed that “any form of external input” is absent from the process, suggesting that if reviews of proposed new policy could be commissioned before the policy was devised it could flesh out the issues, allowing ministers to “take what they want”.

Against the process – or the policy?

Troup said many claim not to like tax process when what they are really against is politicians and their views. He said while “we know what a good tax system looks like”, budgets and tax are a “political act” and “the outcome you see represents a balance between what all of us think we should do and what’s politically feasible”. He added the important element is whether the political intentions behind tax policy have been translated effectively into the actual policy.

Troup said HMRC collects billions of pounds each year with a tax gap of less than 5%. “It’s there to collect a lot of money to fund public services and it does that quite well,” he said. However, he added that there are too many Budgets, done too quickly with a lack of “in-flight scrutiny”.

Dodwell agreed that the process was too quick. He said: “When did Jeremy Hunt first think about planning for this Budget he’s going to deliver next week? It wasn’t very long ago.”

Long-term strategy and roadmaps

Johnson said it remains difficult to have a coherent plan given the number of Chancellors and Prime Ministers the country has been through in recent years, adding: “that’s an area where we have regressed and regressed quite badly. Exactly what the Government wants I don’t really know and it’s that not knowing where the direction is that tells you something about the lack of strategy.” He said that the Treasury compares unfavourably with other parts of government which “have strategy coming out of our ears”.

He blamed the “dysfunctional process” of Budgets, with Troup agreeing that the “theatre” of Budget Day “does encourage that behaviour”. He added: “If you had a more consultative process then that would not happen.”

Rutter also branded the Budget as “deeply perverse”, asking: “If you don’t make them such a big thing would it stop the proliferation and Treasury whack-a-mole of trying to produce things to get positive press releases?” She added that, apart from crises, being Chancellor is “the most boring, low-profile job in government,” and that is perhaps why they relish a day in Parliament to themselves.

Johnson agreed that the way tax policy is created is “so different from the way you should make other policy”. He said: “If you want to support a certain industry or sector, that’s not just a Treasury issue. You might think you should have a bill that talks about it, rather than once a year let’s have a tax relief entirely separate from the rest of the strategy.”

However, Sir Edward said there was a “bright line” between tax and the rest of government policy, which is about paying out money rather than collecting it, and that changing this would be “completely impossible and very damaging” to the tax system.

He said: “Once you move that line you get into endless fights and endless difficulties.”

Dodwell dismissed the idea of widespread use of roadmaps, adding: “The idea of roadmaps is really something for tax administration, it’s not something for personal tax, it’s not something for savings, it’s not really something for corporate tax.”

Capability and internal systems

The panel was more positive on the progress made in developing skills and retaining talent within HMRC and the Treasury.

Rutter said “quite significant progress” had been made in internal capacity in the Treasury, with new training schemes available to employees, including one in the tax advisory market from the CIOT.

She added while the department still has a high turnover of staff, “it does seem that the Treasury is making some real attempts to look at that.”

However, the panel also called for greater investments in the departments to bring them up to the standard of other countries. Sir Edward said HMRC and the Treasury used as many as 69 different systems during his time. Nations like Estonia benefit from more modern and aligned IT capabilities, he observed.

Dodwell also called for greater investment in HMRC and its systems, including a 10-year digital strategy.

Other issues

Rutter said net zero is one of the areas where the Government has not set out a long-term decision and called for it to be prioritised by future governments. She said: “There’s a really strong case for any government to go through the tax system and ask, ‘is this a tax system we would have if we are moving towards an economy of net zero?’”

Answering a question from the audience on whether there was too little focus on the interface between taxes, Dodwell agreed, saying that “too often people focus on their policy and they don’t think hard enough about the fact that it’s their policy now being added to the rest of the tax system”. He highlighted the relationship between inheritance tax and capital gains tax as an area where there is “a lack of joined-up thinking”.

Johnson added: “Very often it looks quite possible but when you put it on top of all the others it becomes a barrier to growth. Governments find it difficult to think in these kinds of ways.”

Alice Jeffries, head of tax at the Confederation of British Industry, asked about what metrics were the most important for tax policy measures, with Sir Edward saying these are often covered by tax information and impact notes (TIINs), but he would like to see these reviewed. He said: “We never revisit them and it would not be that difficult to come back to a TIIN after four, five, six years and just look at what we said and compare it to what actually happened.”

Dodwell said there was now “a lot more information” on tax reliefs and “big steps have been taken”, with Johnson adding: “There’s quite a lot that’s public about tax.”

Watch the full event here.