Autumn Budget: Why Tax Shouldn't Come at the Cost of Growth

With pressure mounting on the public finances, the Chancellor faces a difficult balancing act ahead of the Autumn Budget: raising revenue while ensuring that tax policy does not undermine the investment and economic activity needed to deliver sustainable growth.

For businesses and individuals, the question is not simply whether taxes will rise, but whether the Government can create a tax system that provides the certainty, competitiveness and simplicity needed to support long-term economic growth.

Tax rises may provide revenue, but at what cost?

The Government is under growing pressure to strengthen the public finances, with the cost of Government borrowing now at a twenty-eight year high. That inevitably creates pressure on the Chancellor, John Healey, to identify additional sources of revenue.

However, tax increases should not be considered in isolation.

Elisa Sofocli, Partner, said:

The Government shouldn’t tax its way to growth. There will inevitably be pressure on the Chancellor, John Healey, to raise additional revenue via tax rises at the Autumn Budget as the fiscal position comes under more strain – with the cost of Government borrowing now at a twenty-eight year high. But every tax decision needs to be considered against its potential impact on economic growth

The risk is that measures designed to raise money in the short term could discourage investment, hiring or entrepreneurial activity in the longer term.

Businesses need certainty as well as competitive tax rates

With the Chancellor expected to set out his fiscal priorities on Monday, businesses will be looking for more than a commitment to balancing the books. They need to understand how the Government intends to reconcile the need for additional revenue with its equally important ambition to grow the economy.

For internationally mobile businesses and talent, tax competitiveness matters. The UK is competing globally for investment and skills, and businesses can choose where they put their people and capital. If the UK becomes more expensive and more complicated without delivering greater certainty, we should not be surprised if those decisions start being made elsewhere.

The UK is competing with other jurisdictions for investment, skilled workers and business activity. Tax policy therefore needs to consider not just how much revenue a measure generates, but how it influences where businesses invest and individuals choose to work.

Simpler tax could support growth

The answer isn’t simply more tax; it is smarter tax. If the Government is serious about growth, it should be looking at where the tax system can be simplified and made more predictable, rather than continually adding new layers of complexity. Businesses don’t just pay tax; they also pay to understand and administer it.

This is an important point for businesses of all sizes. The administrative burden associated with understanding and complying with tax rules can be significant, particularly where businesses have limited internal tax resources.

Reducing complexity could therefore support growth without necessarily requiring the Government to reduce tax rates.

Consultation needs to translate into better policy

That is why the current HMRC consultations matter. Consultation cannot be a box-ticking exercise where businesses are asked for their views and then discover the policy has already been decided. If the Government wants businesses to invest and grow, it needs to listen to the people who will actually have to implement these changes.

For businesses, engaging with consultations can therefore be more than a technical exercise. It can provide an opportunity to influence how future tax measures are designed and implemented.

The real test of the Autumn Budget

Ultimately, the success of the Autumn Budget should not be measured solely by the amount of additional tax revenue raised.

A stronger test will be whether the Government can improve the public finances while maintaining an environment in which businesses are willing to invest, employ and expand.

Elisa concluded:

The Autumn Budget should not be judged on how much money it raises. The real test is whether it creates a tax environment that is sustainable for the public finances while still making the UK an attractive place to invest, employ people and do business. Tax and growth should not be treated as opposing forces and getting the balance wrong could make them exactly that

What should businesses and individuals consider next?

Ahead of the Autumn Budget, businesses and individuals should consider how potential tax changes could affect their finances and plans.

Businesses should review major investment, hiring and remuneration decisions, assess their exposure to possible tax changes and monitor relevant HMRC consultations. Internationally mobile businesses and employees should also consider whether changes to the UK’s tax competitiveness could affect future mobility decisions.

For individuals, particularly those with significant investments, property or internationally connected affairs, it may be sensible to review existing plans and understand how potential changes could affect their tax position.

The key is to plan based on confirmed policy rather than speculation, while ensuring that there is sufficient flexibility to respond once the Budget measures are announced.

Would you like to know more?

If you would like to discuss this in more detail, please get in touch with your usual Blick Rothenberg contact or Elisa Sofocli using the form below.