The UK Budget should be assessed in relation to its macroeconomic (aggregate) effects and in relation to its impact on individual elements (i.e. microeconomic effects).
At the aggregate level the hope of the Chancellor is that aggregate public expenditure growth will be curtailed to such an extent that, by the end of the five-year forecast period, total public sector debt as a percentage of Gross National Product (GNP) will be falling. Given the present well-known problems surrounding the provision of a wide range of public goods and services this must be regarded as a very challenging objective.
To achieve this target could involve either significant cuts in public services or increased taxation. The only other solution is a substantial increase in the economic growth rate which the independent Office of Budget Responsibility (OBR) judges to be extremely unlikely.
At the microeconomic level there is much interest among Energy Voice readers in the decision to extend the Energy Profits Levy (EPL) windfall tax by one year to end-March 2029. Independent research by the present author has found that this tax can significantly reduce investment in new projects even in cases where the investor has existing income from other fields against which he can offset his investment costs.
The disincentive effects are particularly noteworthy in small new fields and in incremental projects in later field life. If the investor does not have current taxable income available against which to set his new investment costs the disincentive effects are greater. At the time of writing oil prices are higher than those employed by the OBR while gas prices are significantly lower.
The stresses on the overall UK Budget plus the fact that in the recent past the rate of EPL has been increased and its duration extended gives rise to concerns that further extensions to the life of the Levy could occur. The indicated policy stance of the Labour Party provides additional grounds for concern among investors. Reductions in the capital and investment allowances for the EPL would greatly reduce the returns on investment projects. The additional uncertainty by itself has a negative effect.
The further reduction in the rate of National Insurance contribution for employees in the Budget should have positive effects on work incentives. But the idea that these contributions could be entirely abolished only has credibility when alternative sources for the very large sums involved are stipulated.
The Budget introduces a reduction in the rate of Capital Gains Tax and includes the view that the result could be an increase in revenues from this source because of an increase in the total volume of transactions. The tax is payable only on realised gains not accrued gains.
This discussion of the Capital Gains Tax ignores the fact that historically much tax planning has taken place to ensure that financial rewards take the form of capital gains rather than income which has been taxed at much higher rates. The problem of equity among different taxpayers could emerge the greater the difference in the respective tax rates.
From a tax principle viewpoint, the changes to the tax treatment of individuals in the non-domicile category can be welcomed. A relevant tax principle is horizontal tax equity meaning that individuals with equal taxable capacity should be treated equally by the income tax system.
A second tax principle is vertical equity meaning that individuals with unequal taxable capacity should be treated appropriately differently. The non-domicile provisions prior to the Budget are arguably in breach of both the first and second principles. There may, of course, be consequential effects on the physical location of those who are affected. The size of the effects are difficult to predict.
In the Budget, the Chancellor announced that the fuel duty would again be frozen. While this is popular with motorists who have suffered from the increase in petrol and diesel prices in recent years it is open to question given the other national priority to reduce CO2 emissions. The Climate Change Committee continually emphasises the need for further progress in reducing emissions.
In this context, the UK is now a major net importer of oil and gas which constitutes a significant negative item in the UK balance of payment and GDP. These imports will also have a significant CO2 content most likely greater than the emissions from UK oil and gas production incorporating the stringent environmental obligations now in place.
Current thinking on energy policy emphasises the Trilemma of (1) Transition to Net Zero, (2) security of supply, and (3) fuel poverty. The Chancellor announced several measures designed to enhance the production and utilisation of renewable energy and the reduction of CO2 emissions. These measures are generally to be welcomed. Subsidies are defensible when they clearly exhibit the potential to reduce emissions.
Fuel poverty has traditionally been defined as a situation where the cost to consumers exceeds 10% of disposable income. Whether this measure is appropriate to today’s conditions is open to question. There is a case for reconsidering the appropriate definition and the role of national budgetary provisions to alleviate the problem.
A notable feature of the Budget was the absence of any indexation of the starting point for liability to income tax. Given the high rate of inflation in recent months this results in many individuals with low incomes becoming liable further tax. From the viewpoint of the role of the tax system in redistributing income and wealth, the decision on equity grounds is open to question.
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