Budget Reaction: Clarity Without Direction Will Only Take us so Far

Clarity without direction will only take us so far, says Roger Phillips, Tax Partner at PM+M

With the Budget having been delivered, albeit by the OBR rather than the Chancellor half an hour before it should have, the most positive thing that can be said is that we should, at least for a period, have some respite from months of constant speculation, Treasury leaks and uncertainty. Individuals and businesses should now have time to breathe and take stock – hopefully allowing them to focus on making sensible investment decisions going forward.

However, in a world where the success of the Government’s economic policy is entirely dependent on the creation of growth, many will be left scratching their heads as to whether the government has missed an open goal to deliver a more credible, long-term plan to achieve that growth, which is so desperately needed. Plenty was said about growth and entrepreneurialism, and we heard about expansions of the availability of EIS and VCT, but we could have heard much more.

Other than the farcical start to this Budget, the overarching criticism is that, once again, it has been shaped more by political imperatives and, aside from the significant impact of fiscal drag on household income, a series of many small “picky bit” type changes.

The easy fix to plug the black hole that the Chancellor was faced with this time around would have been for her to increase income tax across the board – something many of us were expecting after her bizarre and unprecedented pre-Budget “preparing the ground” speech earlier in November.

However, with the (political) decision being taken not to increase income tax across the board, the real burden comes via a further three-year freeze on income-tax allowances and thresholds, additional tax on investment income and new levies on expensive properties and consumption. I’m struggling to see anything in there that screams “growth creation.”

From a personal tax perspective, lower-income workers will welcome the rise in the living wage and freezes on certain household costs, however, with a frozen personal allowance that should be closer to £17k if it had increased with inflation, many non-taxpayers will now be drawn into to the tax net in the years ahead.

For middle-income earners, the cumulative effect of the tinkering is likely to be punitive as the pain of fiscal drag continues and, with more being pulled into the higher tax bracket. When this is combined with other incremental tax pressures, for instance the curtailing of salary sacrifice benefits, which have been particularly valuable for those with incomes approaching or in the brackets where child benefit or personal allowances are depleted, this will ultimately mean less money in peoples’ pockets and less cash to inject back into the economy (something that is needed for growth).

On the business tax side of things, there is a sense of under-delivery – albeit that was largely what was expected. The commitment to stability and investment support is welcome in principle, but we are still dealing with a patchwork system of reliefs rather than the coherent, long-term framework required to genuinely boost growth and competitiveness. Businesses, particularly SMEs, have endured years of shifting policies, and today’s announcements do little to resolve the complexity that continues to make business decision making tough.

Once again, this felt like a fiscal event which has been spun to create headlines rather than to deliver structural solutions. The UK’s tax system remains unwieldy and complex. Public finances remain tight, and productivity challenges persist - none of which have been meaningfully addressed.

I fear that by the Chancellor not having grasped the nettle and increased the general income tax rates, we may find ourselves back here in a year’s time (hopefully not six months), with a new black hole to fill –with fewer coins down the back of the proverbial sofa to fill it.

Notwithstanding the above, the value of a period of calm should not be understated. Knowing the facts, even if they are imperfect, hopefully allows individuals and businesses to move forward with decision-making that has been on ice. But clarity without direction will only take us so far.

Personally, I just hope that we get to the position where we have one of these fiscal events a year – something that has been promised. Two to three months of pre-Budget speculation a year is manageable. Four to six months is painful and helps nobody.