Autumn Statement Report Published

• Report: Autumn Statement 2014
• Report: Autumn Statement 2014
• Inquiry Page: Autumn Statement 2014

Some of the key conclusions and recommendations contained in the report include:

1. Inflation

The current inflation target set by the Government is symmetrical, and is 2 per cent at all times. Several witnesses alluded to the risks of very low inflation and subsequent deflation, including the Chancellor. The Chancellor has publicly welcomed the current level of inflation. This is not likely to help anchor inflationary expectations. The Governor of the Bank of England is required to write to explain to the Chancellor why inflation has fallen below 1 per cent. It is important to avoid mixed messages on inflation targeting. (paragraph 27)

“It is very welcome that both the Chancellor and the Governor have confirmed in their exchange of letters that they remain absolutely committed to the 2% inflation target, and that this target is symmetric. When inflation drifts well away from the target it needs to be watched like a hawk.”

2. Ring-fencing

Institute for Fiscal Studies calculations show that following the Government’s outlined path will lead to a total cut to DEL [Departmental Expenditure Limit] in real terms of 22.2 per cent between 2010–11 and 2019–20. However, within DEL, the government has so far chosen to protect certain departmental budgets from budget cuts. If these protections are maintained, IFS calculations show that non-ring-fenced departments will have experienced real-terms budget cuts of 41 per cent between 2010–11 and 2019–20. As we have previously reported, ring-fencing will require spending reductions to be targeted on the diminishing budgets of the non-ring-fenced departments; and we have previously reported on the possible consequences. (paragraph 71)

“Non-ring-fenced departments are likely to face further substantial cuts over the next Parliament from an already reduced base.  The Treasury Committee has highlighted the effects of ring-fencing on a number of occasions.

“All the major parties have made major commitments of this type. Should ring-fencing be maintained, finding the required savings – outside the ring-fenced budgets of health, schools and overseas aid –will become increasingly problematic with each successive round. This could distort the allocation of resources between government priorities. Ring-fenced departments may also be subject to less rigorous scrutiny than non-ring-fenced departments.”

Loss relief is an important element of tax planning for all firms across all parts of the economy. The Committee has previously highlighted the importance of certainty in the tax system in its 2011 Report, Principles of Tax Policy. Apparently lucrative tax raising measures against unpopular sectors of the economy, while attractive to governments, carry the risk of undermining the principle of certainty in the tax system. Uncertainty may well reduce the yield. (paragraph 117)

“A simpler, more stable and fairer tax system is essential to improvements in long-run economic performance.

“Changing loss relief rules for banks may have retrospective effects. It could be at odds with the principles of tax policy recommended by the Treasury Committee in 2011.

“Banks, like any business, need a stable fiscal system to be able to plan with a degree of confidence.  Their lending to people and firms across the country is crucial to the economy.”

Tackling tax avoidance, specifically the problems associated with base erosion and profit shifting, is an internationally recognised problem which requires an international response. This is currently taking place in the form of the OECD’s base erosion and profit shifting project. The Committee notes the Government’s decision to announce a unilateral Diverted Profits Tax ahead of the conclusion of the OECD’s work. This should not be permitted to destabilise the international effort. (paragraph 128)
- The draft legislation is long and highly complex. This is undesirable in itself, and is likely to be a source of uncertainty. (paragraph 129)

“Tax avoidance needs to be tackled vigorously, in the long run by tax simplification and reducing loopholes created by complexity. But the imposition of a tax by the UK on diverted profits could be at odds with the OECD’s international work in this area. The lengthy and complex draft legislation may also increase uncertainty for businesses.”