Spending advice for the chancellor
With the ongoing constitutional soap opera unfolding in Westminster, it’s hardly surprising that the Spending Round announcement from Sajid Javid didn’t make many headlines earlier this month.
With parliament suspended until mid-October, there is some breathing space and time to reflect on the critical role that the Treasury will play in creating an environment where business, the economy, and society as a whole can continue to thrive as the UK leaves the European Union.
It is welcome that the new chancellor plans to loosen public spending within the current fiscal rules.
For the first time in 15 years, all government departments will see a budget increase of at least the current rate of inflation. This is particularly good news given the economic uncertainties facing the country.
However, it is imperative that fiscal prudence is maintained as we emerge from almost a decade of austerity to cut public deficits left after the global financial crisis.
It is essential that the chancellor moves pre-emptively to avoid the need for future austerity measures. A prudent approach is needed if public sector debt is to remain on a downward trend as a percentage of GDP.
The chancellor should also use his new found fiscal flexibility to do three things.
Rebalance the tax burden to tackle climate change
The world has watched in horror as the planet’s largest tract of rainforest burns. The Amazon region is a substantial provider and regulator of our world’s climate. It is one of the planet’s most vital carbon sinks and is also home to priceless biodiversity.
Losing it would represent an unprecedented planetary disaster, and would also make meeting the ambitious targets of the Paris Climate Agreement and the UN Sustainable Development Goals next to impossible.
Wider behavioural change is also needed here in the UK to meet the country’s own zero-carbon ambitions.
To deliver this, a long-term rebalancing of the tax system is required to shift the tax burden from labour to natural resource use, pollution, and consumption.
We must also move towards more consistent taxation of labour across all forms of employment to improve equity and reduce the distortions produced by the current system.
The same approach must be considered for all business models.
As new structures arise, it is more important than ever that there is simplification in the tax system for consistency and continuity purposes.
In addition, it’s vital that the UK’s interests are represented in the unprecedented international negotiations towards a new model for global taxation of the new economy.
Infrastructure investments
The new Prime Minister and chancellor each made increased spending on infrastructure a priority in their respective party leadership campaigns this summer.
Infrastructure is a major employer and driver of economic growth, which makes it of key strategic importance to the UK economy.
But as with all public spending, infrastructure investment must be both targeted and managed.
A lack of political leadership was the biggest barrier to meeting infrastructure needs identified in our report, produced this year jointly with Chartered Professional Accountants of Canada.
This absence leads to the prioritising of high-profile projects over investment in the necessary maintenance of existing assets.
To mitigate this, the government should collect data on the potential of existing assets and the performance of previous projects.
A lack of funding is another barrier. To stop this, the government should consider innovative funding schemes that recover some of the value that public infrastructure generates for private landowners.
The third barrier concerns planning and regulation, where governments fail to use monitoring and oversight.
To guard against this, the UK Finance Function should be professionalised to improve how projects are selected, financed, managed and delivered by bringing in the right professional expertise at the right time.
The recent announcement that HS2 would be severely delayed, with ballooning costs, highlights the negative consequences of ineffective project management.
Modernise support for small businesses
Another of Javid’s priorities is increasing R&D investment and supporting small businesses when navigating compliance issues.
Our UK members provide essential business and financial advice for SMEs in all industries. They will be encouraged by the measures being taken to address late payments.
The incentives for SMEs to invest in productivity and promote international trade need to be modernised.
Businesses should be allowed to use R&D funds to invest in digitising business processes and cloud technologies, alongside developing the sustainable processes and technologies that are so vital for future generations’ health and wellbeing.
One of Javid’s predecessors, Nigel Lawson, famously said: “to govern is to choose.” And the outcomes of the chancellor’s choices in this Spending Round will affect us now and in the future.
These decisions are critical for the UK’s economic and social development, and are the very foundation on which our national wellbeing will be built.