This was a fairly quiet conference on the tax front for the Conservatives, new announcements limited to a stamp duty increase for foreign buyers, edging a little closer to a Digital Services Tax, tweaks to the apprenticeship levy and another year of a fuel duty freeze. Various outriders would like to see more radical changes though – especially corporation tax cuts – and there are hints these might be considered depending on the outcome of the Brexit process.
This is part of a series of reports on tax policy discussions at the main party conferences. A round-up of the Labour conference can be found here and the Lib Dem conference here. A further report will follow on the SNP conference.
Tax after Brexit
Brexit, of course, dominated the conference - and the details are analysed lower down in this report. Even those discussions on other topics were frequently framed in terms of positioning the UK after Brexit, and this applied to tax in particular. For the free market right especially, the ‘escape from Brussels’ grip’ is regarded as the perfect prompt for a round of tax cutting (again, see below).
Chancellor Philip Hammond, in a speech that emphasised the importance of retaining friction-free access between the UK and the EU, and his support for the government’s Chequers Plan, struck a perhaps uncharacteristically upbeat note, predicting that once a deal was agreed there would be “a boost to our economic growth - a ‘Deal Dividend’ - which we will share, in line with our balanced approach, between keeping taxes low; supporting public services; reducing the deficit; and investing in Britain’s future.” This optimism appears to be based on two things – firstly, that the OBR will upgrade economic forecasts in the event of a Chequers-like deal, and secondly, that HMT will no longer need the fiscal ‘wiggle room’ it is keeping against a bad (or no) deal.
Hammond also referred to the need to prepare for the possibility of ‘no deal’ saying he would “maintain enough fiscal firepower to support our economy if that happens”. The Chancellor was not explicit about the form this would take, but press rumours are that he has ‘pencilled in’ the Spring Statement as providing the opportunity to introduce ‘a combination of both fiscal and monetary support’ potentially including billions extra for housing and construction, and renewed quantitative easing. Brexit Secretary Dominic Raab suggested at a fringe meeting that drastic cuts to corporation tax could also be in the mix (see below). Home Secretary Sajid Javid told a separate meeting that if the UK left the EU with no deal and therefore did not face a ‘Brexit divorce bill’, he would choose to use the money to cut taxes. The Daily Express reported during the conference that ministers are planning a package of radical tax cuts to spur the economy if Britain quits the EU without a deal. An unnamed source told the paper that corporation tax could be halved and income tax slashed. This is probably not a Treasury source.
Taxing Big Tech – the Digital Services Tax
The Chancellor used his conference speech to give the strongest indication yet that the government are planning to introduce a Digital Services Tax on the revenue of large digital companies, possibly unilaterally. Philip Hammond told party members: “Global internet giants must contribute fairly to funding our public services. And let me be clear today: The best way to tax international companies is through international agreements. But the time for talking is coming to an end, and the stalling has to stop. If we cannot reach agreement, the UK will go it alone with a ‘Digital Services Tax’ of its own.” The measure was framed as part of a series of proposals to ‘regenerate capitalism’ and restore people’s faith in the free market.
No details of the new tax were announced by the Chancellor, but the government are presumably still thinking along the lines of their March update paper, which “envisaged that an interim measure would be a tax on the revenues of digital businesses deriving significant value from UK user participation… [T]he tax would apply to those businesses wherever they are located, and irrespective of the physical presence that they have in the UK.” The March paper indicates an intention that the new tax not inhibit start-ups and proposes various mechanisms by which this might be achieved.
The proposal was centre-stage at the CIOT/IFS fringe debate, titled ‘What does fair business taxation look like in a digital world?’ Financial Secretary Mel Stride stressed that the proposal would ideally be pursued multilaterally but he feared the US was relatively hostile to it. While the government don’t want to catch people just starting up – and therefore there must be a de minimis threshold – we are committed to doing something about this issue, he said. The minister also raised the issue of user-generated content, observing that digital companies come in different categories (retailers, social media platforms, search engines) but all gain value from their users to some extent. Current ways of taxing don’t pick that up, he said. He confirmed that we should expect ‘some things coming down the line from the government’ on this. At a separate fringe meeting Stride acknowledged the risks of unilateral action on digital multinationals, including the risk of double taxation.
Views within business on the DST proposal vary. Giles Derrington of techUK argued both that the timing was poor, given existing uncertainty around Brexit, and that you cannot distinguish between tech and the rest of the business sector. Claire Hooper of EY and CIOT also thought it was very hard to ringfence digital companies, and that it would get even harder in future. Another representative from techUK, also at the CIOT-IFS event, suggested current measures such as the DST were just ‘patching’, and called for a broad ranging conversation about what the tax system should look like for a digital economy. Carolyn Fairbairn of the CBI warned it could be a "blunt and counterproductive" instrument if improperly designed. But at a number of conference events small business owners said a shift towards internet companies was overdue.
Asked about the proposal by the CIOT at a fringe meeting, Andy Street, Mayor of the West Midlands, said it was part of the solution but not the whole solution. Other panellists agreed the matter was complicated. As with the other party conferences, the idea of taxing internet companies more was widely linked to the idea of taxing high street businesses less (see below).
New stamp duty rate
The Prime Minister announced plans at the conference for a higher rate of stamp duty on non-UK residents (both individuals and companies) buying UK residential property. The one per cent (possibly rising to three per cent) surcharge will be levied on top of existing higher levels of stamp duty, introduced in 2016, on second home and buy-to-let purchases, and the proceeds will go towards tackling rough sleeping. In her conference speech Theresa May framed the measure as part of her ‘personal mission’ to fix the ‘broken’ housing market, alongside measures already introduced such as scrapping stamp duty for most first-time buyers, and the announcement that the government cap on how much councils can borrow against their Housing Revenue Account assets to fund new developments will be scrapped.
Apprenticeship Levy reforms
The Chancellor announced in in his main conference speech that the apprenticeship levy would be reformed in response to concerns from business. In particular the government is raising from 10 per cent to 25 per cent the proportion of the levy that larger companies can transfer to smaller firms in their supply chain. Additionally a further £5 million was announced for the Institute for Apprenticeships to introduce new standards and updating existing ones. The Chancellor said that, in addition to the reforms he had announced, “we will engage with business on our plans for the long term operation of the levy.”
Fuel duty freeze continues
The Prime Minister told the conference that fuel duty will be frozen for a ninth year in a row. She framed it as part of the government’s efforts to put ‘money in the pockets of hard-working people’. She also referenced the high oil price as a factor in the decision. The rumour is the announcement was originally going to be made in the Chancellor’s Budget speech later this month but was brought forward to provide an extra domestic policy for the PM to unveil in her speech.
Other policy announcements of interest to business
The Home Secretary outlined the government’s proposed post-Brexit immigration regime, which would not give a preference to EU citizens and insist that firms try to hire Brits before looking abroad. There will be a light-touch regime for business travellers on short trips and visa applicants will be required to meet minimum salary thresholds before taking a job. Meanwhile the Chancellor announced £30 million of support to “Be the Business” - a business-led initiative to get big-companies to mentor small companies, and announced that President Obama’s former chief economist, Jason Furman, will lead an expert panel to review the UK’s competition regime, to ensure it is fit for the digital era.
The most eye-catching announcement of the conference was the Prime Minister’s declaration that ‘austerity… is over’. What this means in practice is not entirely clear, as the only flesh put on the bone by the PM was that while “debt as a share of the economy will continue to go down, support for public services will go up” and that this approach would be set out in next year’s spending review. It appears to be based on the assumption that a good Brexit deal will be secured.
IFS Director Paul Johnson suggested an extra £20 billion a year would be needed by 2022 to avoid further public sector cuts. Torsten Bell of the Resolution Foundation drew attention to the current figures which show that the Treasury isn't due to balance the books until 2027-08: "That's less ending austerity and more a decade of it to go." He suggested the speech “will have gone down very badly indeed in the Treasury.” Analysis by the FT is that, once the NHS’s ‘70th birthday present’ funding increase, a pledge to keep defence spending constant in GDP terms, and the ongoing fuel duty freeze have been taken into account there is ‘a hole in the public finances of up to £35bn-a-year by the end of the current Parliament’ which will need to be filled either with tax rises or increased borrowing.
Influential backbencher – and former thinktank boss – Neil O’Brien MP told a fringe meeting at the conference that he was concerned the party had taken its eye off the ball on the deficit. Referring to an infamous conference speech delivered without notes by then Labour leader Ed Miliband, he said that ‘Miliband forgot about the deficit and was crucified for it; at the last election we [the Conservatives] forgot about the deficit and that was a mistake.’
There was relatively little Budget speculation at the conference, despite it being just three weeks away (now less than two weeks). Clearly we should expect more on the Digital Services Tax and some other measures trailed at the conference, as well as, presumably, some effort to identify where the promised extra £20 billion a year for the NHS will come from. Both the Prime Minister and Chancellor have indicated that some tax rises will be needed to help fund this. Post-conference media rumours suggest pensions tax relief is among the areas being looked at by the Chancellor. At a Centre for Progressive Policy fringe event on tax and spending Neil O’Brien MP said he expected the Chancellor to ‘keep his powder dry’ and not do much, given the continuing uncertainty over a Brexit deal. A wish to get the Budget out of the way before the final Brexit negotiations is of course the main reason for the earlier than normal Budget (Oct 29th).
Corporation tax rates
Ministers confirmed at the conference that the government still plan to cut corporation tax to 17 per cent. But, as indicated above, there are calls from think tanks on the right (and, more subtly, from some ministers) for them to go much further – particularly, but not only, in the event of ‘no deal’ or only a loose Canada-style deal with the EU.
At a fringe meeting TaxPayers’ Alliance campaigner Chloe Westley (who tweets as LowTaxChloe) argued that cutting corporation tax to 10 per cent would give a helpful boost to UK competitiveness. Brexit Secretary Dominic Raab responded sympathetically: “Chloe wants to lower corporation tax to 10% and the Chancellor has talked about reserving fiscal firepower in case of no deal… What do you want? Of course he’s talking about a recognition that actually in a no deal scenario we want to pull every lever we’ve got to see us through what the short term buffeting, as I’d describe it, or disruption we’d have. The chancellor gave a brilliant speech. It shows you that we are all rowing in the same boat.” The Sun added a little spin to the comments and reported them as ‘Brexit Secretary Dominic Raab Warns Brussels That UK Will Slash Corporation Tax In A ‘No Deal’ EU Exit’.
Business is less excited than might be imagined about the prospect of further corporation tax cuts. Adam Marshall of the British Chambers of Commerce told a fringe meeting that the focus should be on the high upfront costs faced by business (eg business rates) rather than tax paid on any profit they might end up with. He added that the appetite of his members was for stability rather than any bonfire of red tape. Political support for the idea is also lacking. In response to a suggestion on Twitter by a prominent journalist that this (radical CT cuts) “was always [former co-chief of staff to Theresa May] Nick Timothy’s plan when he was in Downing Street if Brussels didn’t give us a decent deal” Treasury Committee chair Nicky Morgan described it as “totally pie in the sky - an example of why Nick Timothy is no longer working for the Conservative Government”. Rupert Harrison, formerly a senior adviser to George Osborne, agreed, saying “Once you get to c20% the returns to cutting it lower start diminishing rapidly”.
More significantly, Financial Secretary Mel Stride also sounded a note of caution on further reductions to corporation tax (beyond 17 per cent), suggesting to a Centre for Policy Studies fringe meeting that we may have hit a ‘sweet spot’ on the Laffer Curve and some of the increase in tax take is down to an improving economy and the bank levy chipping in.
Business rates – the high street’s burden
There is growing pressure across the political spectrum for the government to do more to help ‘bricks and mortar businesses’, who are both losing sales to online retailers – especially Amazon – and being hit with high business rates bills. This was a prominent issue at Conservative Conference as it was at the earlier Lib Dem and Labour events. The central complaint at all three was that it is unfair that high street businesses pay business rates, but online sellers do not.
At a fringe debate titled ‘how can we revitalise the high street’ councillors and business people joined forces to call for a turnover tax on online retailers. The proposal comes from a report commissioned by the New West End Company from Arup and local government professor Tony Travers. Cllr David Harvey, deputy leader of Westminster Council, suggested a one per cent tax on turnover on online companies to be redistributed to the high street, for two years. The impression was that this would be a test period that will enable politicians to assess its merits and give a shot in the arm for high streets. He said a turnover tax should not go ahead unless there is a commitment from the government that it is a temporary measure. Chairman of NWEC, Sir Peter Rogers, explained that such a tax would be on companies that sell 80 per cent or more of goods online. The NWEC believe a one per cent sales tax on online businesses could raise over £5 billion to ease the business rates burden faced by high street retailers.
At a separate event Helen Dickinson of the British Retail Consortium said the business tax system was not fit for purpose. The business rates burden needs to come down, with less emphasis on taxing businesses based on the property they occupy, she said.
At the CIOT/IFS debate the first two questions called explicitly for action on business rates, with one audience member saying they were ‘killing the high street’. The Financial Secretary, Mel Stride, acknowledged the concerns, but said that rates were not the entire picture as to why high streets are struggling - changes in customer behaviour are having an impact too. Paul Johnson of IFS said a reduction in business rates will, in the medium run, help people who own the shops significantly more than those who rent them. The other instruments that you need to think about are regulation and planning, he suggested. Responding to a question about whether business rates could be used to tax online businesses more, when they use physical infrastructure such as warehouses, the minister said major reforms to business rates would take a long time and be politically contentious. It was not going to happen in the short or the medium term. Robert Courts MP, chair of the All Party Parliamentary Group for Small and Micro-Business, said the struggle of high street shops (which he called the ‘jewels of our high streets’) was an emotive issue that is ‘live’ in his Oxfordshire constituency. He acknowledged that the government has rolled out a lot of business rate relief already and that further reform is difficult. He suggested there was a collision of two concepts – the dry, economic basis of taxation, and fairness. The social value of high streets should be maintained, he argued, and the tax system should help to do that.
Business Secretary Greg Clark MP made a similar point at a different event, saying that presence on a high street for a business makes a contribution to society and business rates should reflect that. While not explicit about what that meant, that does seem to imply further downward pressure on business rates. Asked by CIOT about the role his department (BEIS) plays in the debate about how business is taxed Clark acknowledged Treasury was the lead department on this, but said BEIS gathered evidence and talked regularly to the FSB and other representative bodies.
There are hints emerging that the Conservatives may be aiming to get greater credit for what they see as UK leadership in international tax discussions. “We have led the debate on reforming the international tax system for the digital economy,” Chancellor Phillip Hammond told the conference, just ahead of announcing plans for a Digital Services Tax (see above). Earlier in the same session, a party member, Tim Law, a tax governance consultant, had addressed the conference on just this topic, praising what he described as UK leadership on trade, tax and transparency, especially on the Extractive Industries Transparency Initiative and beneficial ownership registers.
At the CIOT-IFS event the Financial Secretary was positive about the BEPS (Base Erosion and Profit Shifting) work, saying it had led to lots of outcomes including the diverted profits tax. He added that it was ‘an ongoing battle’ with ‘creative people trying to find ways around these things’. Claire Hooper of EY and CIOT, at the same event, said US tax reform was making a big difference.
The Party of Business
Brexit is creating friction between the Conservative Party and some of its traditional allies in the business sector. Perhaps in response to this, Theresa May and Philip Hammond both devoted lengthy sections of their keynote speeches to reassertions of the centrality of business in Conservative thinking. May told the conference that offering someone a job was ‘one of the most socially-responsible things you can do’. Hammond said the power of enterprise was ‘the route to unleash talent and to improve lives’ and that backing business was ‘an essential expression of [Conservative] values’.
More specifically, Hammond promised to listen to, and work together with, business. At an ‘enterprise reception’ following his speech he cited the willingness to review the apprenticeship levy (see below) as an example of this. He also asked business to help sell the advantages of a market economy, noting that the public trust the opinions of business people more than those of politicians.
Changing employment and the gig economy
The Budget is likely to see announcements in this area, with the government due to respond to consultations which came out of the Taylor Review, and to decide whether it is going to go ahead with the extension of off-payroll working rules to the private sector. On the latter the Financial Secretary acknowledged to the CIOT-IFS event that the decision presented a difficult trade-off – a problem had been identified but going ahead with this extension would create a ‘heap of complexity’. Read into that what you will! More generally the Prime Minister nodded to the issues involved in her conference speech, observing that, ‘with the gig economy changing how people work, we are changing our employment rules, so new technology cannot undermine workers’ rights’.
Back at the CIOT-IFS event, the Financial Secretary observed that, when you look at how people work, with the advent of the ‘gig economy’ and personal service companies, you see whole areas of the tax system where stability is ‘crumbling before your eyes’. He compared this to the stability brought by property taxes, such as stamp duty. The different treatment of employed and self-employed people for national insurance purposes was also raised at the event, with Paul Johnson of the IFS citing it as an example of unfairness in the tax system, but the Financial Secretary responding that it is reasonable to help entrepreneurs because they are taking higher risks, compared to those working for a large company in a more secure role. However he added that there are some people who, while notionally self-employed, are to all intents and purposes in an employer-employee relationship.
Personal tax reform
There was relatively little discussion of personal taxation at the conference, in contrast to the Labour and Lib Dem gatherings. It remains Conservative policy to raise the income tax personal allowance to £12,500 and the higher rate threshold to £50,000, in both cases by 2020 – though there are rumours this might be delayed as the Treasury searches for the money to ‘end austerity’ (see above). There was certainly little mention of these policies (going forward, as opposed to what has already been done) by ministers at Birmingham.
What discussion there was was on the fringe. In addition to the traditional demands for lower taxes (see below) simplification continues to loom large as an objective. Kate Andrews of the IEA repeated that organisation’s calls for the merger of NICs with income tax. Tom Kibasi, Director of the left-leaning thinktank IPPR, spoke of his frustration that wealth is taxed less than work income. At the same event former minister John Penrose MP agreed with Kabasi that it seems wrong that people who get money from investments get taxed less than those who get their income from work. He used the example of hedge funds that benefit from a dividend tax rate of seven a half pence in the pound.
Neil O’Brien MP, a former economic adviser to both George Osborne and Theresa May, is one of the few MPs on the Conservative side engaging in debate on property and wealth taxation. At a fringe meeting he expressed particular interest in ways to capture increases in land value for the exchequer. Responding to a question from CIOT about the debate going on in the Labour and Lib Dem parties about a structural shift to taxing wealth, capital and land, O’Brien said land value taxation was ‘not insane’ but has many of the same problems as business rates. Gemma Tetlow of the Institute for Government (and formerly of the FT and IFS) responded that it did remove disincentives to improve property. O’Brien added that the problem with capital taxes is that people need to have the ability to pay. He added that people really don’t like inheritance tax.
At the CIOT-IFS event Tax Minister Mel Stride explained the lens by which he looks at tax - it should be competitive, fair and it should be paid, he said.
Devolution is not quite the hot topic at Conservative conference that it was at the other party gatherings, but there are pockets of support, particularly (and unsurprisingly) among the party in local and regional government.
At a fringe session on devolution and ‘core cities’ George Freeman MP, chair of the Conservative Policy Forum (and a great great great nephew of Gladstone) said people don’t trust big government but they will do things for their city they would never do for the government at Westminster. City regions should, he said, get the ‘profound devolution’ (including fiscal powers) that they need. Specifically he called for city regions to be allowed to raise infrastructure bonds. Referencing Brexit, he concluded: “If ‘take back control’ stops at Westminster that’s a very narrow vision.”
However Andy Bounds of the FT, speaking at the same event, warned that there is a growing issue of a divide between places with combined authority mayors - where resources are concentrated - and those without. Responding to a question from CIOT, he said he thought business rates had been ‘broken by e-commerce’. We need something else – a sales tax? But, he added, cities in the north will continue to need transfers from the south. Marvin Rees, the Labour Mayor of Bristol, criticised the lack of predictability and consultation over finances – what he called the ‘bid and beg’ culture. There should be a conversation before the budget (Budget?) is announced, he said, adding that, at present, we don’t know what will be in it until it is announced.
At the CIOT-IFS debate an audience member suggested it was time for a wholesale slimming down of the tax code. But tax minister Mel Stride, while offering general support for simplification, dampened hopes of wholesale change, suggesting it carried more political risks on the downside. It would create winners and losers, the losers always make more fuss, and the government would have to be sitting on a majority of 100 seats in the Commons and be fairly sure it would be elected again to enjoy the benefits when they eventually emerge, said Stride. He added that Finance Bills are long largely because they are trying to achieve subtlety, for example through carve outs for smaller businesses, as well as because of the need to include many definitions, to tackle loopholes and to provide for reliefs. Robert Courts MP, chair of the small business APPG, said that, as a barrister, he knows short legislation can leave gaps of interpretation. Thus a slimmed down Finance Bill, although desirable, may create loopholes. Claire Hooper of CIOT and EY observed that length and complexity are not the same thing. Mel Stride agreed, saying the government’s focus was on trying to provide easy to understand guidance. He is working on a project with HMRC to use guidance to help slim down the tax code. Courts also said that he would like to see a simpler interface with HMRC for business. Making tax digital has “glittering potential” he added. Hooper observed that it is hard for international companies to keep track of all measures being proposed by different governments.
The Financial Secretary must have had an idea what he was letting himself in for when he agreed to appear on a platform with representatives of the Centre for Policy Studies, Institute for Economic Affairs, Adam Smith Institute and the TaxPayers’ Alliance, under the heading ‘Will we ever cut taxes again?’, and the event did not disappoint. The thinktankers made the case for further movement on corporation tax, abolition of stamp duty and other tax cuts. But Mel Stride put up a robust performance, arguing that the government ‘can cut taxes, is cutting taxes and will cut taxes going forward’. However, he cautioned, ‘we are not out of the water’ when it comes to rebuilding the economy since the great economic crash ten years ago. In response to comments from panellists about the positive behavioural impacts of tax cuts which make them cheaper or even revenue-raising, Stride said that he wants the Treasury to make greater using of dynamic modelling.
At a fringe on ‘What does business want after Brexit?’ former cabinet minister Priti Patel said that, “as Conservatives in government, we haven’t done enough to cut taxes.” The party should have a debate on taxes post-Brexit, including looking at the TaxPayers’ Alliance proposal for a ‘Single Income Tax’, she said. Another former cabinet minister, Boris Johnson, told a fringe meeting: “We should be constantly aiming not to increase but to cut taxes, mindful of the insight of the great 14th century Tunisian sage Ibn Khaldoun – picked up by Arthur Laffer – that you can often cut taxes to increase yields. We should have as our objective – as soon as possible – to cut taxes for those on low and modest incomes, because it is Conservative to give people back control of their money.”
Free markets, free trade
The perceived opportunity of Brexit, and the perceived threat of Jeremy Corbyn, have given a fresh impetus to the traditional push from the Conservatives (or parts of the party at least) for free trade and free enterprise. Chief Secretary to the Treasury Liz Truss perhaps waxed the most lyrical of those on the main stage, reinforcing her reputation as a cheerleader for the market while framing it in terms of what it can deliver for the public. “Free enterprise is not about allowing big corporations to flout the rules. It’s the opposite of that. It’s about the power of competition to deliver lower prices and better services for consumers. It’s about the power of people to transform their own lives, and change our country for the better. Those are the freedoms we are fighting for.”
Chancellor Phillip Hammond followed up with a strong defence of capitalism combined with an attack on Labour. “We have a Shadow Chancellor of the Exchequer who’s declared aim in life is “fomenting the overthrow of capitalism”. Now, Liz, that really is a disgrace! The model that has delivered 200 years of economic growth, that has seen living standards in this country more than double in my lifetime, that has lifted countless hundreds of millions out of poverty around the world, and that has secured our freedoms and our liberties down the ages, is rejected out of hand by Corbyn and McDonnell in favour of the failed and faded ideologies of socialism.”
DExEU minister Suella Braverman was among those on the fringe calling for the UK to be “a beacon for free trade in the world”. Rishi Sunak MP said the Conservatives needed to be passionate and talk from the heart about the benefits of capitalism.
Looking to America
The free market right in the UK has strong links with its counterparts in the United States and the two often feed off each others’ ideas. Thus it was unsurprising to hear praise at the conference for President Trump’s tax cutting agenda. Sam Dumitriu, Head of Research at the Adam Smith Institute, suggested the UK take the best bits of Trump’s reforms, to deliver a low tax future for the country. Rishi Sunak said the Trump agenda was delivering growth of four per cent: “That growth would be transformative here [in the UK].”
The US is also seen as a key trade ally, notwithstanding Trump’s protectionist instincts. Shortly before the conference a group of 11 conservative and libertarian think tanks in Britain and America published a report called “The Ideal U.S.-U.K. Free Trade Agreement: A Free Trader’s Perspective.” Daniel Hannan MEP explained that the US has the same common law and accounting standards as the UK. He said the report was based on the principle of mutual recognition rather than common standards. Ted R. Bromund, the Margaret Thatcher senior research fellow at The Heritage Foundation, said as China and the EU in their different ways do their best to restrict competition, the US and Britain can stand together to show that there is another way, a way that respects both national sovereignty and economic freedom. DExEU minister Suella Braverman described President Trump as a free trader who wants to do business with the UK. Yes, he has protectionist tendencies, but the UK is not at the back of the queue on a trade deal, as threatened by President Obama, she said, adding that there is a ‘working group’ in government working on a free trade deal with the US and she is confident it will deliver.
Four economic challenges
The Prime Minister’s keynote speech was generally judged a big success – not least by its favourable contrast to last year’s infamous performance. Part of that is down to its clear construction. The second half of the speech, once Brexit and a few non-economic issues had been dealt with (verbally at least), was devoted to an attempt to set out the four economic challenges she judged were facing the country and what the government was doing or would do to tackle them. To varying extents tax is relevant to all four.
The four challenges are:
• Fixing markets (some of which are not working in the interests of ordinary people). Policies here include tighter corporate governance rules; changing the rules on bonuses; changing employment rules, so new technology cannot undermine workers’ rights; an energy price cap; a review of railways; and, on housing, scrapping stamp duty for most first-time buyers, the higher overseas rate and lifting the cap on local authority borrowing.
• The cost of living (employment is up, but too many people haven't had a decent pay rise). Policies here include cutting income tax, the national living wage, extending free childcare and freezing fuel duty.
• Ending austerity (the deficit is down, but achieving that has been painful). No details here, beyond a signpost to next year’s spending review, but some tax increases will surely be needed (see above).
• Helping communities ‘left behind’ (our economy is growing, but some communities have been left behind). Policies cited here include a modern industrial strategy; Heathrow third runway and other infrastructure; driving up research spending; and investing in training and retraining. Few would dispute there is a major issue here (it was raised numerous times at both Labour and Conservative conferences) but it is an open question how far these policies would provide particular help to ‘left behind’ communities as opposed to the major urban centres of the UK and other parts of the country already relatively prospering.
A roundtable discussion at the conference considered how to create a savings environment which is fair and sustainable. Attendees highlighted the Single Finance Guidance Body (SFGB) due to be launched next year as a positive step for individuals so they can make informed choices about their finances. Much of the focus was on pensions – specifically auto-enrolment, which was largely lauded as successful, though some businesses representatives highlighted the upfront costs and administrative burden. There was some debate on social care and whether a mandatory savings scheme for social care would be appropriate. The government is not ruling anything out and this will be considered in an upcoming Green Paper. Many present highlighted the issue of creating a system which incentivises people to save for such costs – a system which subsidises those who haven’t saved throughout their life erodes the incentive to do so.
Brexit – the policy
Brexit, of course, dominated the conference, with hardline ‘go it aloners’ and those who want to stay close to the EU arguing it out on the fringe and, more subtly, on the conference floor. The former got the bigger audiences, with ‘Chuck Chequers’ badges far more common than their officially sanctioned equivalents and Boris Johnson, in particular, getting a rousing ovation from an audience of 1,000-1,500 whom he told that Chequers would be cheating the electorate. However, grassroots opinion notwithstanding, if anything, momentum has edged back slightly more to the Prime Minister, following the positive reception she got for her keynote speech setting out the Chequers option (while carefully not using the word).
The Prime Minister did throw a small bone to the Brexiteers by refusing to rule out ‘no deal’. While leaving without a deal would mean tariffs and costly checks at the border and would be a bad outcome, Britain would come through it, and to rule it out would weaken the UK’s negotiating position, leaving us having to agree to whatever the EU offers, she argued. May framed the two options currently on offer from the EU as being “a deal that keeps us in the EU in all but name… and stops us signing trade deals with other countries” and “a deal that carves off Northern Ireland… effectively leaving it in the EU’s Custom’s Union.” By contrast, her proposal (ie Chequers) was “a free trade deal that provides for frictionless trade in goods. It would protect hundreds of thousands of jobs in the just-in-time supply chains our manufacturing firms rely on. Businesses wouldn’t face costly checks when they export to the EU, so they can invest with confidence. And it would protect our precious Union”.
Brexit – the critics
Framed like this, the PM’s proposal won warm applause, but her critics see the choice differently. The previous day Boris Johnson had framed Chequers as an arrangement that would leave us “locked in the tractor beam of Brussels. We will not only be prevented from offering our tariff schedules. We will be unable to make our own laws – to vary our regulatory framework for goods, agrifoods and much much more besides. This is politically humiliating,” he concluded. Johnson said the alternative was “a super-Canada trade deal”. The UK government should, he said, “use the otherwise redundant and miserable ‘implementation period’ to the end of 2020 to negotiate the super-Canada FTA, to invest in all the customs procedures that may be needed to ensure continued frictionless trade, and to prepare much more vigorously for a WTO deal.”
0ther critics made similar points. Former Trade Secretary Lord Lilley thought WTO rules were a good basis on which to trade. Steve Baker MP, a Brexiteer who was a DExEU minister until July 2018, said that the Chequers proposal was indicative of a ‘terrible supine approach to Brexit negotiations’. He thought ‘Canada-plus’ would be a good deal and would probably go through Parliament. Economist Shanker Singham, now of the Institute for Economic Affairs, was ubiquitous at the conference, promoting and defending his report, Plan A+: Creating a prosperous post-Brexit UK. Singham’s case is, essentially, that without an independent trade policy Brexit is just a damage limitation exercise. MP Marcus Fysh said he had spoken to customs brokers and freight forwarders in Brussels recently. They told him they had told HMRC that Chequers was unworkable. Daniel Hannan MP said Salzburg stabbed a stake through the heart of Chequers and filled it with bullets.
Few of the Chequers critics addressed the issue of the Irish border – and when they did most simply said the backstop proposal should be scrapped. A number of senior DUP MPs, including party leader Arlene Foster, were at the conference and took an even stronger line. According to Politico, the big moment of the conference was Foster’s blunt refusal to countenance any type of border checks between Britain and Northern Ireland. Nigel Dodds MP, the DUP’s Leader in Westminster, made clear in a TV interview that he and his colleagues would prefer a no-deal Brexit to anything approaching the backstop proposal. Lest we forget, the government continues to be dependent on the DUP’s MPs to sustain its parliamentary majority.
There were few, if any, voices at the conference calling clearly for the UK to stay in the customs union or otherwise strike a closer arrangement with the EU than Chequers. Pro-Europeans mostly restricted themselves to challenging the claims of the ‘hard Brexiteers’. Treasury Committee Chair Nicky Morgan MP – one of the most prominent – wrote in The Times that a Canada-style free trade had many problems: “it doesn’t achieve a frictionless border and would be the first free trade agreement to introduce barriers to trade, it does nothing to assist sectors such as medicines, chemicals and pharmaceuticals which rely on EU certification and it is silent on services (which make up 80 per cent of our economy).” She also observed that the Canada-EU agreement had taken seven years to agree. She thought a Canada-style agreement was “about weakening European stability. I know there is a secret hope amongst some Brexiteers that the UK leaving will bring the whole of the EU crashing down.”
Brexit – The Way Forward?
Theresa May’s mission to shore up support within her party for her position on Brexit was a qualified success but she still faces a huge challenge reaching agreement with the EU and then getting that deal through Parliament. As a number of commentators noted, she framed her proposal in a way that avoided a row but failed to change the fundamentals of her situation.
However, media reports during the conference offer a glimmer of hope to the PM. According to The Telegraph the UK has a ‘bold new plan’. The government will propose the UK “remains in a de facto customs union with Europe, to avoid an Irish Sea border, while leaving Northern Ireland to align separately with single market rules.” The compromise would apparently accept that companies in Great Britain would face greater regulatory checks with the EU than those in Northern Ireland. The UK would agree to maintain EU tariffs on goods and to remain part of the common commercial policy. According to The Times, the concession is likely to enrage Brexiteers, who will claim that it amounts to staying in a partial customs union indefinitely, severely limiting the scope to sign trade deals with other countries. Under the proposal the arrangement would end only when a mutually acceptable technological solution to the Irish border issue was found (described as enabling imports into Northern Ireland to be electronically tracked to their end destination). While the arrangement is described as ‘temporary’ it would not be specifically time-limited.
The Sun’s reporter in Brussels tweeted that EU diplomats are suddenly “more optimistic than for months that a deal is possible”. Suggestions are that a deal needs to be agreed in outline by October 15, in order for the PM to address EU27 leaders at an informal dinner two days later, ahead of the full summit that starts the next day. At time of writing that seems an optimistic timetable!
CIOT Head of External Relations
(Additional reporting by Hamant Verma)