CIOT/IFS Labour Conference Debate 2023: Tax and Public Finance Challenges Facing the Next Government

The joint event, “Tax and Public Finance Challenges Facing the Next Government”, featured a panel of tax and economic experts, chaired by Gary Ashford, CIOT president and tax partner at Harbottle and Lewis. The speakers were:

• James Murray MP, Shadow Financial Secretary to the Treasury (FST)
• Paul Johnson, Director of the IFS
• Ellen Milner, CIOT Director of Public Policy

The Shadow FST said growth is “front and centre” of Labour’s plans if it wins the next general election and that last year’s mini-Budget shows simply lowering taxes is not the way to achieve this.

He said: “It’s not by accident that the number one mission is to get the highest sustained growth of the G7. We see that growth as absolutely crucial to unlocking everything else.

“Ultimately we would like taxes on working people to be lower but that has to be done on the basis of fiscal and economic responsibility.”

The Shadow FST said as part of the party’s plans, Labour would look at replacing business rates with a “better system” which would support high street shops and ensure multinational giants “pay their fair share”.

He said: “We all know the impact recent events like COVID have had on our high streets, which have been struggling for some time. Having reformed business rates and scrapping the current system and replacing it with a better system for the 21^st century will really help to encourage that economic vitality.”

He added that Labour would produce a roadmap for business tax, which would give business owners “certainty and stability”.

Murray added that money from the abolition of non-dom status, a Labour pledge, would be used to help shorten NHS waiting lists, alongside improvements in areas including the use of technology. “It’s not just about putting more money into the system, long-term reform is really crucial,” he said.

Paul Johnson said governments are “seriously powerful” in their ability to generate growth but it has to be exercised over the long term, while determining a “fair share” of tax is tricky as households earning the same amount can be in very different situations. He added that the recent spike in inflation means the UK is in a “different world” to previously. “I expect inflation come next year to be significantly below where it is now but we’re not in a world which we’ve been in for quite some time before,” he said. “Inflation is going to remain an issue for a period of time.”

He agreed that business rates “need reform”, adding: “The way they change occasionally by big amounts is damaging and basing on the overall value of the property paid by the occupant leads to lots of problems.” He suggested instead a land value tax paid by the owner rather than the occupant, while also blasting stamp duty land tax as “disastrous”.

Johnson said the next government will be left with a “difficult situation” in terms of the economy and that the tax system allows more flexibility than spending. He suggested improvements in efficiency and equitability across areas like capital gains tax, inheritance tax and council tax, but said that for “big changes” to be made, the Government may need to look at the three biggest revenue raisers – income tax, National Insurance and VAT.

However, Ellen Milner warned that any substantial changes to income tax or National Insurance would need “a really solid foundation” as they bring in such a large proportion of the overall tax take.  By contrast, the digital services tax raises £350 million in a year, “not all that much in the grand scheme of things”.

Johnson also criticised the “crazy” system of personal tax rates and thresholds, adding that the UK is an “unusually unequal country in terms of income”. He said some of that is to do with the fact that our out-of-work benefits system is “pretty mean”, while a lot of it is to do with how the labour market works.

He said: “The area where I don’t think the tax system works is the taxation of wealth. Because the older generation is getting wealthier we would expect more inheritance tax over time, possibly doubling over the next decade. The fact there’s no tax on passing on pension pots seems to me to be completely mad. What’s the best use of a pension? Leaving it to your children?”

Ellen Milner said headlines on tax tend to focus on tax rates, thresholds and deterrents or promotions for types of behaviour, which she does not believe will “get the whole pot of gold” needed to solve problems.

She said that 45% of the current £35.8 billion tax gap comes from “failure to take reasonable care and error – failing to get things right” and blamed problems with simplification, digitalisation and HMRC service levels for that.“All of those provide avenues to help people get things right,” she said. “One approach we could take to this is to prioritise our tax administration and compliance system. It’s important we have some much better, concerted data analysis in Government about what’s causing the problems we’re seeing.”

She added that sensible spending and efficiency was also important, saying “If you’re going to get the goodwill of people for the tax system there has to be trust in the system and belief money will be well spent.”

Johnson said the next government will soon have to “grasp the nettle” of replacing fuel duty and he expects the UK will eventually have to move to road pricing, adding: “I don’t expect any party to put it in their manifesto!”

Milner agreed that any future Government should be “proactive” on motoring taxes, ensuring there is a system “ready to put in place when it’s needed”.

Watch the full event.