Jeremy's Blog 17th July 2020 - Economics and taxation

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 16th July 2020

We have this year seen parts of the modern economy unravel, enormous injections of public money to support continuity, the acceleration of business change and the possibility of working with virus restrictions for some time to come. The response to that has been to focus on re-growing the economy and unlocking productivity improvement in the wider economy.

With a probably smaller economy next year, there may be little scope for tax rises and perhaps less for further cuts in public spending to handle next year’s probable deficit. Encouraging growth will need investment and innovation, using the currently low cost of finance. Part of that will be the large and growing government infrastructure programme, improving connectivity and the earning capacity of the economy (with the associated compulsory purchase work). Private business and investment will also be critical in what will be needed for the economy and for climate change.

This week has seen a knee jerk response to the announcement of the Office of Tax Simplification’s review of Capital Gains Tax, its first specific review of CGT in its 10 years of work. It follows a review of Inheritance Tax which began in January 2018 and looks like a routine process for a tax with complexities that, much changed over the years, has perhaps never really found its shape. The CAAV will be submitting evidence and the review seems unlikely to report before well into next year.

Like Inheritance Tax, CGT’s yield of £9bn (1 per cent of tax receipts) is small beside the issues at stake, but its influence on investment by unincorporated businesses and individuals is substantial. The headline rate of 20 per cent is near to that thought to maximise revenue, so increasing the rate would risk reducing disposals and tax revenue, friction for an economy that needs to change. It seems at least as plausible that this announcement is timed to prompt disposals to drive activity than that it is a “starting pistol” for tax rises.

The flexibility allowing the new economy to emerge could require radical change, with some of the first signs of that with the changes coming to development control policy in England. Farming will see change driven by the loss of Basic Payment and possible trade pressure. The Treasury can earn more money and achieve more economic change if CGT does not stand in the way of the associated transactions. Those gains could be worth more than an apparent general increase in CGT.