CIOT and IFS Conservative Conference Debate 2022: Tax Cuts, Growth and the Cost-of-Living

Watch the debate here.

This is a write-up of our fringe event at the Conservative Party Conference. You can read our review of our fringe event at Labour Party Conference in Manchester here.

The title of our event – Tax cuts, growth and the cost of living – was chosen to enable a wide-ranging debate on the new government’s economic policy following Liz Truss’ elevation to the role of Prime Minister at the start of September.

Chaired by CIOT President Susan Ball, the panel included Stuart Adam of the Institute for Fiscal Studies, the economics editor of the Financial Times, Chris Giles, and John Myers, co-founder of the Yimby Alliance, a group working to improve the affordability and quality of housing across the UK.

While the main tax talk to dominate the bars, lobbies and fringes of the conference was of the government’s decision to abandon plans to abolish the 45p top rate of tax, Chancellor Kwasi Kwarteng sought to move the debate on to talk about the government’s plans to grow the economy and boost tax revenues.

Kwarteng told delegates that it was time to move on from the “turbulence” caused by the policy and sought to refocus attention on plans to support businesses and taxpayers through a range of measures including the reversal of plans to increase Corporation Tax, the shelving of April’s National Insurance increase, the reversal of IR35 reforms and the development of Investment Zones.

But what was the reaction among the panel and the more than 250 guests watching in-person and online

Chris Giles said that the Chancellor had delivered some “very nice words” that few would find fault with, such as his commitment to fiscal discipline and desire to pursue economic growth.

However he warned against blaming Britain’s burgeoning tax burden for the country’s sluggish economic growth of recent years and urged caution when thinking about the ability of tax cuts to create the conditions for economic growth. He also said that the ambition to achieve fiscal discipline had yet to be backed up by evidence of how it would work in practice, while the Chancellor’s decision not to enforce IR35 legislation had the potential to create opportunities for evasion.

John Myers said that the relative decline of GDP per head in Britain could be reversed if the government worked intelligently so solve the productivity puzzle. He welcomed the Chancellor’s commitment to regulatory reform but stressed there were other areas where reforms could be accelerated, including to planning, education, childcare and the energy market. But he said that solving these challenges would not be an easy task, pointing out that  successive government had for 70 years failed to tackle planning reform. Stuart Adam welcomed the government’s focus on economic growth but cautioned against making assumptions about future growth, which may have worried the markets in the aftermath of September’s fiscal event.

Highlights from the question and answer session that followed the Chancellor’s speech included the following:

Was the decision to scrap the Office for Tax Simplification (OTS) a sensible or foolhardy move?

Stuart Adam said that it was hard to see how the decision to scrap the OTS sat well with the objective of achieving tax simplification. He said that the OTS had been doing a useful job, even if the recommendations hadn’t led to a transformation of the tax system. He added that its work had tended to gain less traction when more radical options for reform had been proposed and had been most effective when ‘tinkering around the edges’. Chris Giles disagreed and said the decision to scrap the OTS had been a good move because it had become a quango ignored by successive chancellors.

Will the reversal of the planned increase in Corporation Tax attract investors to the UK, or is the ease of doing business more important than the headline rate of tax?

Adam said it would help, as evidence had shown that business investment can move in response to rate changes. But he added that it was not the only factor looked at when investments are being considered, saying that the decision to permanently increasing the Annual Investment Allowance to £1 million had been a “good and welcome” move.

Are tax cuts sustainable given that the cost and amount of borrowing has increased significantly?

Adam said the tax cuts proposed by the government were “probably not sustainable” in the long term without spending cuts, which he said could be pushed further down the line to make them more politically palatable.

Giles said that the public shouldn’t be surprised if the toughest spending cuts are deferred until after the next General Election. And he also suggested that there were other areas of income tax policy that the government should be considering alongside its basic rate, including the removal of the personal allowance taper for those earning above £100,000 and the introduction of a higher top rate of tax.

Will IR35 changes simplify the tax system or will HMRC end up being bogged down in correspondence with individual contractors?

Adam said that the changes to IR35 weren’t really a simplification of the tax system and questioned the suggestion made earlier by Giles that it would lead to tax evasion, arguing that there was a need to look again at how different forms of employment were taxed.

What should the Chancellor announce when he sets out his fiscal plan in November?

Giles argued that the Chancellor should set out credible fiscal rules and avoid gimmicks, especially the temptation to defer ‘very steep’ spending cuts until after the next General Election.

What would the reaction have been had the mini-budget been published prior to the pandemic?

For Adam, the mini-budget had come at an awkward time for the government. He understood the need for big policy interventions like the energy price freeze, but saw no obvious or credible reason for the scale of tax cuts that had been proposed. He said these would create inflationary pressures and could stoke further rises in interest rates. Coupled with a lack of fiscal forecasts, such announcements would have been bad at any time, he argued.

How can we address distortions in the tax system that disincentivise work?

There was an acknowledgement among all three panellists that the withdrawal of the personal allowance for those earning more than £100,000 per year had created a complicated and opaque point in the income tax system. Adam said this was exacerbated further by the withdrawal of means-tested benefits such as the high income child benefit charge and the tapering of the pension allowance. These all added to the complexity of the tax system.

By Chris Young, CIOT External Relations.