Sluggish tax revenues a concern
A worrying feature underpinning the fiscal numbers in November was that tax revenues had been sluggish in the first half of the fiscal year. When the tax take is measured in proportion to the size of the economy it varies from year to year, but during the 1980s it fell significantly, from above 40% to the low 30s. In recent years, however, it has hovered around just above 35%, with latest projections suggesting it will rise gradually in coming years. There are serious questions as to whether this can be squeezed higher without the economy suffering - I am not convinced it can, although a different approach to the taxation of housing may be explored in the future.
Mitigating the business rates hike
Because the UK still has a sizeable budget deficit the Treasury appears to be under constant pressure to raise taxes where it can. This is not without its problems, as has been highlighted by the recent increase in business rates. At a time when retaining confidence is key, the decision to impose significant rises in business rates among some groups of small firms may force the Chancellor to look for additional funds this week to ease the transition. Notwithstanding this, one of the trends in recent years has been the cost of implementing specific tax commitments: increasing personal tax allowance, cutting corporation tax and periodic decisions to freeze fuel duty.
While the Chancellor may be under pressure to ease the pain on business rates, there is always the possibility that he will try and raise taxes in other areas. Ones that have been speculated about include limiting tax relief on pensions, and aligning national insurance payments for the self-employed with those in employment. From an economic perspective and in the face of global competition, there is a strong argument to limit the upward trend in the tax take and in the process keep income and corporation taxes as low as possible to help economic incentives. I think they should also be kept as simple as possible, avoiding tinkering in such showcase occasions.
Policy in a post-Brexit Britain
In my view, Brexit allows the UK to position itself in a competitive, fast-changing and growing global economy. President Trump aims to pursue policies aimed at cutting taxes and easing regulations. Even though the Chancellor may not have much room for manoeuvre, he has to be congratulated for making clear the UK is still keen to head in the direction of lower taxes and easing the burden on business.
Also welcome has been the government's focus on an industrial strategy. For the first time in decades one can be genuinely positive about the main thrusts of policy. But, there is much more that needs to be done.
Westminster - and business - should be excited about the ability to return ‘competencies’ from Brussels in so many areas, including state aid and regional policy, and a sensible migration policy. Alongside this there is no doubt that there are many things that we could have done better while in the EU that we need to do better now, not least in education and skill training.
Budget Day: the impact on financial markets
In addition to the specific measures, the question is how will financial markets be impacted? It is hard to imagine any immediate impact on monetary policy. The Bank of England looks set to keep interest rates on hold. Also the global reflation that has been underway since last year - seen in terms of easing fiscal policies, and still accommodative monetary policies - looks set to continue, helping global growth.