What might a smorgasbord budget dish up?
With increases to income tax rates currently off the menu, Rachel Reeves is reportedly preparing a selection of bite-sized tax changes to balance the country’s books. Some key questions that remain are, what will feature on the Chancellor’s “smorgasbord” budget plate, and how large is it?
While it is expected that there will be a few larger tax-raising measures, such as an extension to fiscal drag, council tax surcharges and restrictions to salary sacrifice on pensions, we could still see the smaller announcements having to fill a hole in the region of £10bn to £15bn.
Here is a summary of potential measures and the estimated amounts they could raise:
£0.4bn*
£13.5bn
*Estimate based on c.5% additional IHT revenues
Thomas Pugh, chief economist at RSM UK, said: “It’s not just the size of the tax rises that matters, which taxes are raised also matters. Compared with simply increasing income tax, the “smorgasbord” board approach raises a number of risks.
“It is difficult to be sure how much revenue will be raised through smaller taxes as behavioural changes can be much more significant than with taxes like VAT or income tax. Not only does this reduce the credibility of the budget, as markets can be less sure of revenue estimates, but it also increases the chances of distortionary behavioural changes that damage employment, investment and growth.
“It also decreases the chances that the budget will be deflationary. Increases in duties and employer taxes, for example, will keep inflation higher for longer and give the Bank of England fewer reasons to cut interest rates.
“Similarly, if much of the fiscal tightening relies on fiscal drag and threshold freezes, instead of raising tax rates, then the impact on the economy will be delayed. This will save some of the pain next year, but it will make the budget less credible and lessens the chances of more rate cuts next year.
“The smorgasbord approach sends a signal to financial markets that the government is putting politics ahead of economics, which isn’t a recipe for building credibility and bringing down borrowing costs.
“Ultimately, the smorgasbord approach is less plausible, more economically distortionary and almost certainly more inflationary than other approaches. This reduces the prospect of more interest rate cuts next year and increases the risk of unnecessary damage to the economy.”
Chris Etherington, tax partner at RSM UK, added: “The general theme of the smaller tax changes is likely to be one of wealth redistribution, rather than wealth creation.
“It may not be apparent at the outset, as the immediate target is likely to be older taxpayers with wealth, but those most impacted may ultimately prove to be younger generations hoping for some financial help and a gift of existing family wealth in the future.
“The budget may go some way to tackle the inequality of the “inheritocracy” amongst Millennials and Gen Z, but those impacted may feel like it is a levelling down of the playing field, with a perception of limited help in the short-term for everyone to climb up. A gradual move towards reducing the multiple layers of taxation on workers and eventually merging income tax and National Insurance contributions may address that in time, but it does not seem like there will be much in this budget that takes us in that direction.
“The response to any increases to capital gains tax and inheritance tax receipts may be emotive and where we could see the biggest distortion of behaviour. What that will look like will depend on the menu of tax measures that the Chancellor serves up. In the extreme, it could further encourage individuals to explore a move overseas. We could also see business owners using vehicles like companies to defer an income tax liability or individuals looking for an opportune time to make gifts when assets are depressed in value.
“The clear and present danger presented by the “smorgasbord” approach is not just political, with the inevitable dismay the various measures may bring, particularly proportionate to the tax revenue they could raise. There is also the risk the strategy does not raise the hoped-for revenues, possibly due to behavioural response, potentially leading the government to come back for further, more certain, tax rises in the future.”