You Might Not be Interested in Tax, but Tax is Interested in you!

Tax is not the most likely subject to be front of most HR professionals’ minds  but whilst you might not be interested in tax, tax is interested in you. With two budgets and a spending review scheduled for 2020, the coming year will see the whole of issue of tax rising to the top of the political, economic and business agenda. Tax increases are almost inevitable over the next decade. The looming fiscal crunch means that tax will become one of the main political battlegrounds over the next few years. Do you really think the inevitable reform of the UK’s tax and benefits system is something you can afford to ignore? We beg to differ. We believe it is something all HR people need to start thinking about. And soon.

One reason you might not be interested in tax is that politicians have spent the last two decades avoiding an honest conversation with voters about the dilemma we face. At first sight, the UK tax system could be said to be working well. After missing its deficit targets for years, the government narrowed the gap between revenue and spending. The UK is a relatively low tax country by international standards and its tax system is far less complicated than it was in the 1970s and 80s. Taxes on earnings have fallen for all workers and especially for the low paid. Our tax and benefits system has redistributed income so that there has been little increase in inequality over the past thirty years. Our benefits system helps and encourages people to work and employment is at record levels. Do we really need to worry?

Unfortunately, we do. The social, environmental and economic headwinds of the 2020s are likely to act as a brake on economic growth while increasing the demands on public spending. The advanced economies are facing a triple whammy of slow economic growth, ageing populations and high government debt accumulated after the financial crisis. This will put pressure on public finances and make it extremely difficult to deliver the level of public services and welfare their populations have become used to without increasing either tax or government borrowing. Most of the advanced economies and many of the emerging ones will face similar challenges, leaving them with some tough choices to make about how to raise and spend tax.

According to projections by the Resolution Foundation, all other things being equal, public spending as a percentage of GDP is likely to return to its 1970s level early in the next decade and continue rising past its postwar peak by the 2040s. There are only three ways in which this scenario plays out – higher taxes, higher public debt or the withdrawal of government from some service provision. The most likely outcome is a combination of all three.

Governments, then, will be desperate to increase their revenues. They will be tempted to tax the things that are easy to get at and low risk politically. Publicly quoted companies and workers on PAYE are obvious targets. The systems are already set up, the taxpayers visible and their earnings reasonably transparent.

The trouble is, as Resolution Foundation chair Gavin Kelly pointed out in the FT, for many people, the tax and benefits system already works in such a way that a pay increase doesn’t leave them much better off. What impact might further tax increases have?

Which brings us back to you, the HR and reward professionals. We believe this is something about which you should be aware and forewarned. That is why we have put together a panel of experts for the next PARC meeting on 18 March, to discuss the issues related to income tax, possible options going forward and how these might impact performance and reward strategies.

By the time we meet, the new chancellor will have delivered his budget. It may give some indication of the direction of travel but it is unlikely to address the underlying issues. Future budgets will need to square the circle between fiscal responsibility and populist profligacy.  This constant tension in government spending plans will provide the economic backdrop for strategic planning within UK business for years to come.

The debate over tax and public spending will become increasingly urgent over the course of the next decade as it becomes ever clearer that existing tax rates and tax systems can’t cover the increasing pressure on public spending. The longer we put off the debate about taxation, the more difficult it will be when we are eventually forced to discuss it.

CRF’s sister business PARC (Performance and Reward Centre) is hosting an event: The UK Tax Regime – What Impact Does It Have On Investment, Performance and Productivity. If you’re interested in attending and for further information, please contact Melissa Bates: melissa@crforum.co.uk  

 

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