As a result of the Brexit vote, we have seen political turmoil and share price volatility as well as a significant drop for sterling.
A post-Brexit “emergency Budget’ appears to have been ruled out by new Chancellor Philip Hammond.
Volatility in share prices is something we have quickly got used to the idea of living with post-referendum. But based on what we have heard from the Chancellor both before and after the vote it seems we are also experiencing some tax prediction volatility.
First we had the prediction of a tough Budget with spending cuts and tax increases to close an estimated £30bn hole in Government finances. The wisdom of such a Budget has been questioned by more than a few.
Earlier in the week of the referendum, before the polls opened, the Treasury published the Government borrowing figures for May, along with an updated estimate for 2015/16 borrowing.
Such was the focus on Brexit debate, the numbers garnered little attention. However, as consideration turns to the post-Brexit world the Treasury’s data is a useful starting point in answering the “what next?” question. Key points are as follows:
- The revised borrowing number for 2015/16 was £74.9bn, £2.7bn higher than the March 2016 Budget projection from the Office for Budget Responsibility but £16.7bn below the 2014/15 outcome. In the grand scheme of things, £2.7bn is a small difference but one in the wrong direction.
- The OBR’s projection for 2016/17 borrowing is £55.5bn, which it now turns out is £19.4bn below last year’s figure, rather than £16.7bn less.
- After two months of 2016/17, borrowing has totalled £17.9bn, £0.2bn up on the same period last year. To be on track, the number should have been £13.1bn.
- The maths means that to hit target borrowing in the next 10 months must be £19.6bn lower than 2015/16 – i.e. about £2bn a month less, on average.
Thus even before the referendum, the Treasury data suggested George Osborne was not going to hit his 2016/17 borrowing target, regardless of the outcome. He was facing a difficult Autumn Statement, in part due to cooling UK economic conditions brought about by Government-induced Brexit uncertainty.
Most recently, in a sign he had moved away from an austerity based strategy, at least in relation to businesses, Osborne suggested he would be looking to bring the UK’s rate of corporation rate down below 15 per cent – though Hammond will not confirm whether this will still take place.
The theory is that this would provide strong evidence Britain is a great place to do business, regardless of what challenges may lie in relation to any new deal for trading with the EU.
Interesting on the face of it, and a move that may be worth considering.
The OECD’s head of tax, however, has warned of the potential danger of such a move to the UK’s negotiation with the EU in relation to the terms of trade that can be secured post-Brexit. He termed the move one of “tax dumping”.
Right or wrong, some may think ‘he would say that wouldn’t he’?
The shape of tax policy will undoubtedly remain the subject of considerable conjecture until we get some firm indication of the direction of travel.
This will presumably come in the shape of a Budget following the appointment of Theresa May as PM, delivered by an entirely different Chancellor.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn