Budget demands and warnings lower Chancellor’s headroom

Business groups have banded together to call for an overhaul of the business rates system, while think tanks have been crunching the numbers on the state of the public finances.

When Chancellor Rishi Sunak stands up to deliver his third Budget on 27 October, he will find that his room for manoeuvre is restricted by these, often conflicting, demands and pressures. So, how will the Chancellor find a path through them?

Trade associations band together on business rates reform

A joint statement issued by 41 of the UK’s trade associations recently called on the government to reform business rates in order to help unlock green investment. The statement comes in the lead up to COP26, and is signed by groups including the British Retail Consortium (BRC), Build UK, SMMT, The British Travel Association, Oil and Gas UK and UKHospitality. Together these groups represent around 261,000 businesses and nine million employees.

Their joint statement outlines how action by the Chancellor at the Budget to reform the current business rates system could ‘unleash a wave of business investment across key government priorities, including net zero and levelling up’.

The statement says that presently, in England, the existing ‘outdated and outmoded’ business rates regime ‘acts as a drag on the government’s goal of a high wage, high productivity and high investment economy’.

It adds that with up to 50% of business investment potentially subject to business rates, the current system actively disincentivises business investment in decarbonisation and wider investments that can improve productivity, which is the only sustainable route to higher wages.

Uncompetitive, unproductive and unfair

The trade groups say that business rates are uncompetitive when compared to international rivals. UK property tax levels are four times higher than Germany’s, and 50% higher than the G7 average, as a proportion of GDP.

They also claim they are unproductive, as that they directly put firms off from investing to make their business more energy efficient or competitive. If a business invests in solar panels or other plant and machinery to improve their property it increases their rates bill. As these investments take several years to yield a return, the immediate increase in rates often makes the investments unviable.

Lastly, they are unfair, according to the trade groups. The current system helps ingrain considerable inequalities between the richest and poorest areas of the country, penalising businesses in areas of slower growth.

Chancellor left with little room for manoeuvre

However, the challenge the Chancellor faces when assessing the tax system was laid bare by a report from think tank the Institute for Fiscal Studies (IFS). It found that despite improved economic forecasts, Mr Sunak will have ‘little room for manoeuvre’ in the Budget and Spending Review. The IFS says that this year’s historic announcements of tax rises will increase the UK’s tax take to its highest sustained level in peacetime. The think tank also says these are more the inevitable consequences of population ageing and pressures on health and care spending than they are consequences of the coronavirus (COVID-19) pandemic.

To meet his stated objective of achieving current budget balance, the Chancellor will have to increase spending on services other than health, defence, schools and aid by less than he was planning pre-pandemic, the IFS added.

Balancing act

Although government borrowing this year could be more than £50 billion lower than was forecast in the March Budget, the Chancellor will still have to perform a delicate balancing act on 27 October.

There will be many interested parties watching on to find out where tax demands have changed or spending needs met.

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