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Huge financial headache awaits the next government

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With the election probably only a year away, far-sighted accountants should already be considering the implications for themselves and their clients. Whoever forms the next government, taxes and the economy are going to be a challenge. Philip Fisher wishes them luck – they are going to need it.

6th Sep 2023
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Given that the current government is obliged to call a general election by January 2025 and there is every chance that it will go to the polls around a year from now, this may be the first but will not be the last AccountingWEB article considering the brave new world thereafter.

Whether it is a new start for Rishi Sunak or the changing of the guard with Sir Keir Starmer and Rachel Reeves living side-by-side in Downing Street, decisions on the economy and the tax regime will have significant consequences on our lives as taxpaying citizens and our work as accountants.

In the last week, Labour bigwigs have made two major announcements that they may well regret in the fullness of time.

Fully funded mantra

Already, they had set the context by constantly repeating the mantra that any government spending commitment would be fully funded. This immediately takes borrowing out of the equation, which some influential economists believe to be an error of judgment.

Having taken this approach, they are broadly left with three possible strategies to achieve the party’s economic, social and political goals.

  1. Increase productivity.
  2. Cut costs beyond the current austerity levels.
  3. Increase taxation.

Eliminating borrowing had already limited perspective governments’ options considerably. Last week, Rachel Reeves went further, tying one hand behind her back by confirming to the Daily Telegraph that an incoming Labour government would not target expensive houses, increase capital gains tax or put up the top rate of income tax.

Oddly, freezing taxes on the rich comes straight out of the discredited playbook of Liz Truss and Kwasi Kwarteng, if not going as far as their crash-and-burn philosophy that followed to its logical conclusion would have left the wealthy pay no taxes at all.

A few days later in an interview with the Daily Mirror, Sir Keir tied his shadow chancellor’s other hand by stating: “We’re not increasing tax across the board.”

Given all of the criticism of the Conservative Party’s austerity policies over the last dozen or more years, and accepting that lack of investment in the past is now coming home to roost, option two of cutting costs across the board also seems to have been ruled out.

Instead – like George Osborne, Rishi Sunak, Jeremy Hunt and several other long-forgotten, shorter-lived Chancellors of the Exchequer – Ms Reeves appears confident that under Labour the UK will suddenly discover its mojo and move from second gear into productive overdrive without crashing the vehicle.

Unpacking the data

There is a lot to unpack from the raw data and this article is designed to be an initial foray into the world of tax, economics and politics but should help to set the scene.

Even before the recent news that hundreds of publicly owned buildings, maybe thousands, are collapsing and will need millions (maybe billions) of pounds of remediation, quite how Labour was planning to balance the books was questionable.

Inevitably, there will be other urgent capital projects to come out of the woodwork when the new government carries out an audit, although some of the costs could be met by ditching the ill-fated HS2 project.

In addition, would anyone really want to bet against UK plc suffering catastrophically from debt interest payments and defaults on Covid loans over the next few years?

It is also going to be necessary to cover the ongoing downside caused by the financial fiasco that was Brexit.

In principle, boosting productivity is the answer but nobody has cracked that one yet. One route that a Labour government might favour could be to boost public sector pay, though that might backfire badly if it merely increased costs without achieving anything else.

Boosting national output has also been severely hampered by the departure from Europe and Labour’s insistence that it has no plans to enter into closer ties with our neighbours will make the job even more difficult, increasing costs for importers and exporters and limiting the labour market.

Threatened recession

Tax revenues could also be a problem, if the threatened recession comes to pass or even if the economy continues to bump along at an effective standstill.

There are already predictions of large numbers of insolvencies, while windfall taxes rely on windfalls and, like the proposed abolition of non-dom status, have already been allocated. There is also the great unknown as to how many non-doms jump ship for Monaco or other sunny climes, which will harm an already sinking property market and have a dampening impact on the additional tax revenues.

One rich source of income has not been fully tapped and that is clamping down much more successfully on the fraudsters and profiteers who got rich on the back of the Covid pandemic and what is beginning to look like the virtual destruction of HM Revenue and Customs as a force for recovering underpaid taxes.

It bears repeating that every additional pound spent on the tax department yields around 30 and a new government of whatever political faction will desperately need every one of those £30 and ideally a billion of them.

If a combination of these strategies and any others Reeves can think up fails to have the desired effect, any Labour government will then presumably need to copy its predecessors and specialise in those miracles of modern society – stealth taxes and U-turns.

Replies (5)

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By Open all hours
06th Sep 2023 17:56

We have builders and other tradesmen booked solid till next summer. We have a wedding photographer with a full diary until February 2025. We hear of caravan parks fully booked for 2024. We saw three serious buyers of VW outside a closed showroom last bank holiday Monday.
We know that anyone with an aptitude for work will do well. The best will earn phenomenal money.
There’s no hint of any recession in our recent experiences.
That’s not to say that someone from the government won’t try and wreck it all.

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By Justin Bryant
07th Sep 2023 10:56

Liz Truss was right in agreeing with me that the muppets in the Treasury were to blame, but unfortunately she turned out to be an even bigger muppet.
https://www.accountingweb.co.uk/any-answers/treasury-muppets

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By Ian_mcdonald
08th Sep 2023 10:19

"There is also the great unknown as to how many non-doms jump ship for Monaco or other sunny climes ..."
... and doms for that matter. It is presumed that the upheaval would dampen their move - wrong - I know one cryptocurrency billionaire who upped sticks with 3 young children and off to Monaco at the mention of wealth taxes by whoever was the Chancellor a few years back.

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paddle steamer
By DJKL
08th Sep 2023 15:15

Well, to me looks like there is only one viable approach for Labour, re-label.

This has worked for politicians for years, for instance Harold Wilson cut the Civil service at a stroke by moving postal workers out of the CS.

So, they need to get some money for the Keynesian schemes, just put a different label, look into the funds of Life Offices/public sector pension schemes etc.

Our governments of whatever hue never say it as it is, "If you want tip top Scandi services you need to pay for them", they all fudge, British electorate does not want the taxes etc, so effectively they keep finding ways to rake a bit outwith the mainstream, special levies etc, " these are not tax, honest Guv."

They are all fast approaching the point where they will be putting a knife into the top of the kid's piggy bank to get out a 50p piece, they are not honest but of course UK press, media, electorate will not elect them if they are honest; in a way we are all as dishonest as our politicians as we singularly fail to recognise there is no such thing as a free lunch.

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