Treasury Committee probes Autumn Statement tax announcements

The committee first questioned a panel of economists, then the Office for Budget Responsibility, then the Chancellor and a senior Treasury official.

The report below focuses on the tax elements of the three hearings and mostly ignores the other matters discussed.

Monday 21 November – The Economists

The committee questioned:

• Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.
• Linda Yueh, Fellow in Economics at St Edmund Hall, University of Oxford
• Carl Emmerson, Deputy Director at the Institute for Fiscal Studies
• Mike Brewer, Deputy Chief Executive at Resolution Foundation

Freezing the income tax threshold

Discussing incentives to work, Samuel Tombs told the committee: “If you are trying to boost labour supply, freezing tax thresholds—the income tax threshold and the national insurance threshold—as a way of raising money is probably not the best way to go about it. Obviously, there are many reasons why people choose not to work, but freezing those allowances for the best part of this decade is certainly eroding the incentives.”

Asked by the chair if there could be a better approach, Tombs observed: “If we increase VAT, that keeps inflation higher than you might otherwise like, but it does not have these labour supply side impacts. Perhaps there are other taxes, such as capital gains tax, which could be aligned more closely to income tax rates, that would potentially not have an impact on labour supply but are another way of raising money.”

If tax is taken up by freezing thresholds rather than putting it on the headline rate, does that not take more money from those in the middle than it does those at the top as a percentage of their earnings, asked Dame Angela Eagle.

Carl Emmerson replied that “if you are raising the same amount of money by pushing up the rate, you will hit people who are on higher incomes more than if you raise the same amount of money by increasing the threshold. It would be more progressive to increase rates than it would be to increase thresholds.”

Emmerson continued: “The most progressive way to cut income tax is to increase the thresholds, so the converse is also true: the least progressive way to increase income tax is to reduce the threshold. Of course, it is still a very progressive tax.”

Impact on growth

Conservative MP Anthony Browne wanted to know how growth-friendly the Autumn Statement was.

Samuel Tombs said it was not very growth friendly in the near term. But, he noted, “public sector investment has largely been spared from cuts, particularly in the near term. Obviously, there is a relatively high fiscal multiplier associated with public sector investment; it tends to pay dividends for the economy, whereas raising taxes—obviously, it depends which taxes you raise—generally has a lower multiplier effect on the economy… Compared with the 2010s, the policy mix here is perhaps more growth friendly. If you have to do fiscal consolidation, balancing it a bit more evenly between tax rises and spending cuts is a better way to go than the 2010s, when there was a lot of emphasis on spending cuts.”

Linda Yueh said she understood that the Government plan to carry out a consultation around the R&D changes. She suggested doing that “for the entire set of tax measures, because every fiscal decision around taxes has an impact on how firms will invest and how they think about things, whether it is dividends or capital gains. I think it is worth looking at the entire set and seeing if there are ways of putting together the fiscal side with the investment side, in a way that can show which measures are pro-growth, which are more redistributive, and which are purely trying to balance the books. I think that kind of clarity would help.”

Carl Emmerson thought the tax changes were “disappointing, in the sense that the Government has gone for an approach where it is pushing up taxes—it is going for a higher tax burden—yet it is not reforming those taxes. Pushing up unreformed taxes is more damaging to the economy than reforming the taxes to make them smarter and then pushing them up.”

“[W]e are pushing up council tax, yet in England it is still based on what your home was worth in 1991 and put into eight bands,” he noted. “If we want to put up capital gains tax, why don’t we get rid of the exemption at death, introduce indexation and then shove the rates up? So, put up the rates on a reformed tax to get rid of some of the unpleasant distortions.” He wasn’t sure what the Government’s strategy is on business rates.

He later elaborated: “Capital gains tax is badly designed. It taxes gains that could just be because of inflation. It encourages people to hold on to their assets right through to death, rather than realising gains earlier. I would much rather have a system that allows some indexation, which gets rid of that tax-free death element, and then, having reformed it, increase the rate or cut the threshold so it is a better tax. You can do that to lots of other taxes, too.”

Energy profits levy

SNP MP Alison Thewliss asked about energy efficiency spending and energy independence before turning to the energy profits levy. Will it put off energy companies from investing in the UK, she asked.

Mike Brewer did not think it should, offering the view that it has been reasonably well crafted to indicate that it is a temporary measure. Carl Emmerson agreed, adding that “if you are doing investment now, you are getting a deduction at a higher rate than what you will expect to pay in tax when you generate revenues from that investment in future years once the tax rate falls back down again.”

Linda Yueh thought that “electricity generators are wondering about whether they can write off their investments. I think that a bit of clarity is required there.”

Are there any other industry sectors that have seen windfall profits that have come through in the past year or so that could be reasonably asked to pay a bit more tax, Thewliss asked.

“That is a good question,” Brewer replied. “I don’t know of any. We must of course remember that an awful lot of the excess profits being made right now are going overseas, and so we have got no hope of taxing them. It is the Saudi Arabian Government, for example, that is benefiting, or the Norwegian Government, and there’s not much we can do about that.”

“The only thing that struck me was that the electricity generator levy is being introduced from January 2023,” added Samuel Tombs, “so those companies have had a year or so of unusually high returns, whereas the energy profits levy on the oil and gas sector was introduced immediately in May. There has been a bit of a windfall that hasn’t been captured by the Government by introducing that slightly later.”

Other areas covered by the questioning included:

• Changes to the labour force since the pandemic
• Risks to the OBR’s economic forecasts
• The pros and cons of the £900 cost of living payment
• The Chancellor’s fiscal targets and fiscal headroom
• Whether the Government is doing enough to protect households
• Spending on health and social care, and education

You can read a full transcript of the session here or watch it here.

Tuesday 22 November – Office for Budget Responsibility

The committee questioned:

• Richard Hughes, Chair, Office for Budget Responsibility
• Andy King, Member of the Budget Responsibility Committee, OBR
• David Miles, Member of the Budget Responsibility Committee, OBR, and a professor at Imperial College

Business investment and the super-deduction

The chair observed that the OBR was being “pretty gloomy about business investment” and did not seem to think any of the Autumn Statement measures, including the higher annual investment allowance, would have a massive impact on it.

Richard Hughes assented. “Business investment has been pretty disappointing for a while in the UK and, with a shock to household incomes and a shock to consumption… it is unlikely that you are going to see lots of businesses investing into a recession.”

He continued: “The Government now are going ahead with the corporation tax rises. Had they not done that, that would have provided some support to investment over the course of our forecast, but, as that measure is now going ahead and the corporation tax rise goes up, that further reduces the post-tax return on investment.”

Has the super deduction had an impact, the chair asked.

Hughes replied that: “It is a bit too early to say, because it does not close until April, so it still has a few months to run. When we last looked at it compared to our original estimates, we had overestimated take-up and how much investment it was going to stimulate.”

Tax increases as a share of fiscal consolidation

Labour MP Rushanara Ali asked about fiscal consolidation: “What proportion of the Government’s fiscal consolidation would you say comes from tax and spending and how does this compare with the fiscal consolidation of 2010?”

Andy King said there were “a few ways of looking at this, because there have been many fiscal events since our last forecast. In terms of the measures that this Chancellor has announced in the autumn statement and the decision not to go ahead with cutting the basic rate of income tax that was announced on the 17th, that adds up to £62 billion in the final year of the forecast, which is precisely half and half tax and spending. The difference with the Treasury’s numbers is that they separated out that basic rate income tax measure, so that is where they get the £55 billion rather than the £62 billion”.

He continued: “Looking at things relative to policy as it stood in March, so how it has changed our forecasts, the consolidation is worth about £40 billion in the final year and that is simply because part of this Chancellor’s consolidation is to cover the surviving tax cuts from the growth plan, of which the health and social care levy is by far the largest. That consolidation is about a quarter tax and about three-quarters spending.”

On the other hand, said King, you could look at what is planned to happen over the medium term. “If you look at spending and tax relative to where they stood in 2019, spending rises by about 4% of GDP in eight years and so does the tax burden. In that sense, it is an expansion of both state and tax burden over that period.”

“If you compare it back to what happened in 2010, both what was planned over five years and what was delivered over about eight years, the share was about 80% spending and about 20% tax. Also, in a sense, it led to a shrinking of the state and a very modest rise in the tax burden through raising VAT.”

Income taxes and incentives

Labour MP Siobhain McDonagh asked about the impact of the tax burden on economic growth.

Andy King said there was “not a tight link between how economies grow and how high the tax burden is, essentially because these are relatively moderate tax burdens and the tax rates that are charged are relatively moderate. There are no 80% tax rates left. If you look across Europe, you can find countries with higher tax burdens in the UK that grow more quickly and you can find ones with lower tax burdens that grow more quickly.”

Commenting on the threshold freezes he said: “I am careful not to say that they are raising a lot of revenue, because essentially we have negative real income growth at the moment, so those threshold freezes reduce the extent to which revenue is lost through real incomes falling. Relative to where the thresholds would have been if raised with inflation, they raise £25 billion to £30 billion, depending on which measures you include by the end of the forecast.”

David Miles said that the tax measures in the Budget ‘do a bunch of different things’. “Because the value of allowances will be eroded, there are more people who will face higher tax rates and their marginal tax rates are higher. Our assessment is that, on balance, that is a disincentive to work. It is a disincentive because we think that there are two offsetting effects, one of which is slightly more powerful. You get less pay to keep as a result of working the extra hour or the extra day in the week. That is a disincentive.”

But he added: “There is an offsetting effect that goes slightly in the other direction, which is about higher average rates of tax—for many people the average rate of tax they will pay on their income is going to be that much higher—and the extent that it reduces their disposable income. If they try to compensate for that, they might well work a little bit more.”

Miles agreed with King that, “within limits, the tax take out of GDP can go up or down a few percentage points and it probably does not have an enormous negative or positive effect on the supply potential of the economy. One cannot push that argument too far, because there comes a point—it may be that we are not so close to that point yet in the UK—where the distortionary effects just get greater and greater.”

Richard Hughes resisted McDonagh’s attempts to draw him into commenting on how much ‘clamping down on non-doms’ could raise.

Tax increases and growth

Conservative MP Anne Marie Morris asked which tax increases the OBR thought had had the biggest impact on growth.

Richard Hughes said the changes this autumn “have had broadly offsetting effects because you have not gone ahead with the health and social care levy but then you have frozen the thresholds. We think the net effect of that is smaller than the effect that any one of those measures would have had, but mildly negative for labour supply. You have gone ahead with the corporation tax rise, which has an effect on post-tax incentives to invest.”

He continued: “Overall, if you look at how we have written up the policy measures in the book and the way we have analysed them in the forecast, there has really been not very much long-term growth effect from the net effect of all the policy measures taken in this autumn statement. There are other factors that have led us to change our view of long-run potential outputs in the UK slightly, but none of it really derives from policy measures taken in this Budget.”

Morris was ‘a bit surprised’ that the OBR think the corporate tax increase will lower output by only 0.2%, given how much it is expected to raise.

Hughes responded that the corporation tax forecast “is one of the most uncertain aspects of our forecast always, and in particular this time, in that corporation tax is levied on profit, so it depends on the profitability of businesses. There are lots of allowances in the system. It is by its very nature much more volatile than income tax, which, so long as people have a job and are getting paid, they pay. This time around there are some big tax changes and some big changes in rates, which could have larger behavioural effects than you might expect from the smaller changes.”

He added that there are also “some quite novel things going on, such as the pillar 2 reforms that try to collect a minimum amount of corporation tax from companies resident and operating in particular jurisdictions. It raises huge uncertainty about whether these things can be implemented and then, once they are implemented, how successful they are in a given period. In that sense, our corporation tax forecast is always very uncertain and there are additional reasons to be uncertain this time around.”

Other areas covered by the questioning included:

• The OBR’s lack of involvement with the autumn’s first fiscal statement
• Differences between the OBR and Bank of England forecasts
• Capital expenditure and growth
• Fiscal targets and fiscal rules
• Debt interest spending
• Fuel duty
• People who are economically inactive
• Sustainability of pension and benefit spending
• Energy costs and support

You can read a full transcript of the session here or watch it here.

Wednesday 23 November – The Chancellor

The committee questioned:

• Rt Hon Jeremy Hunt MP, Chancellor of the Exchequer
• Dan York-Smith, Director, Strategy, Planning and Budget at HM Treasury

A wide-ranging discussion included debate on a number of the tax measures contained in Hunt’s statement, from the decision to lower the threshold for the additional rate of income tax through to wider income tax threshold freezes, Britain’s tax burden, support for business, non-doms, HMRC investment and enforcement and the government’s windfall tax on energy companies.

Better Budgets?

We start where the Committee’s session ended, with Harriet Baldwin (Chair) asking the Chancellor to commit to ensuring that future spring statements and budgets would be accompanied by Office for Budget Responsibility (OBR) forecasts, given that, she said, words such as 'Mini-Budget', 'fiscal event' and so on have entered the language in order to get around legal commitments to publish independent forecasts.

The Chancellor gave a firm and unambiguous commitment: “Yes”.

Income tax thresholds

Harriet Baldwin began by asking the Chancellor whether the decision to lower the additional rate threshold amounted to breaking the Conservative manifesto commitment not to raise rates of income tax, given that those earning between £125,000 and £150,000 would now be paying a higher rate of tax.

The Chancellor said he had been ‘very open’ about the challenges faced by the government but that he was also committed to maintaining existing tax rates. He argued that the focus on thresholds – rather than rates – was symbolic of the government’s longer-term ambition to cut taxes and bring down headline rates.

Dame Angela Eagle (Labour) was also concerned that the government’s decision to freeze thresholds would have a negative impact on middle earners. Hunt acknowledged that the decision to freeze thresholds was a tough one, but reiterated his ambition to reduce tax rates in the long-term.

The Chancellor added that the decision to lower the 45p rate threshold would mean those on the highest incomes would contribute more, but Siobhain McDonagh (Labour) was sceptical, saying that the government’s income tax policy would see public servants such as police officers, school heads and nurses dragged into higher rates of tax.

Britain's burgeoning tax burden

Rushanara Ali (Labour) and Anthony Browne (Conservative) raised concerns about the UK’s rising tax burden and its impact on economic growth, with Browne also concerned at the government’s decision to reverse the planned 1p cut in the basic rate of income tax. Hunt told both of his ambition to bring down taxes over the long-term, but stressed that the unique economic circumstances of 2022 made this unlikely in the short-term and required ‘difficult decisions’. Controlling inflation, bringing down debt and reforming public services would all be required in order to create the conditions for a lower-tax economy.

Non-doms

Siobhain McDonagh argued government should be doing more to end non-dom status and secure additional tax receipts to support public investment. The Chancellor said he had to find a balance between protecting revenues (he said non-doms contributed around £8 billion per year to the UK economy) and creating the conditions to encourage wealthy individuals to remain in the UK.

He said that such regimes were commonplace across Europe (citing regimes in Ireland and France) and warned that ending this status could put future tax receipts at risk, as these were ‘highly mobile’ people who could choose to leave the country. Hunt said that he wanted wealthy foreigners to pay as much tax in the UK as possible, adding: “I want to make sure we do not do anything that inadvertently loses us more money than we raise”.

HMRC investment

Emma Hardy (Labour) questioned whether the levels of funding given to HMRC to help them tackle fraud in the tax system were sufficient.

She said the additional funding given to HMRC (£79 million over five years) was small beer when compared to the £280 million given to the Department for Work and Pensions to tackle benefit fraud, even more so considering evidence given to the Public Accounts Committee by HMRC head Jim Harra that the authority was able to recover £18 for every £1 spent on enforcement.

Hunt said he was determined to tackle fraud ‘wherever it is’ and said that the money given to the DWP reflected the intensity of work required to identify fraud in the benefits system. He rejected Hardy’s implication that the funding levels were ‘ideological’, saying it was ‘mistaken’ to suggest the government was failing to properly tackle tax fraud. He told the committee that the funding given to HMRC reflected the levels of investment they needed in order to do their job.

Business taxes

Anthony Browne wanted to know more about the government’s plans to use the tax system to incentivise business investment. Hunt said that ‘in ordinary circumstances’ he would like to see a ‘competitive’ tax system with ‘long-term plans for growth’ and ‘big tax breaks’ to encourage investment, but that at present, his priority had been to shore up capital investment opportunities, which would provide a long-term boost to the economy.

Dame Angela Eagle (Labour) questioned the fairness of the decision to reduce the bank profit surcharge from 8 per cent to 3 per cent. The Chancellor argued that, alongside the increase in the headline rate of Corporation Tax, banks would still be paying a higher marginal rate of tax on their profits than in other European countries in spite of the surcharge cut. 

Energy profits levy

Dame Andrea Leadsom (Conservative) considered that the decision to impose a windfall tax on energy companies amounted to retrospective taxation. The Chancellor – asked whether he supported retrospection – said he was ‘absolutely against windfall taxes that are not real windfalls’ but said that, in this instance, they were appropriate given that energy companies had made far higher profits than anticipated when investment decisions were originally made.

He said that the system had to be fairly designed and reiterated the government’s commitment to provide support for energy investment across other areas of the tax system, such as through the investment allowance.

The Chancellor acknowledged Leadsom’s point that electricity generators were unable to benefit from the allowance but said that these firms benefitted from contracts signed under the Contracts for Difference scheme, which are not subject to the levy.

You can read the full transcript of the meeting here or watch it here.