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By Gillian Fawcett, head of public sector, ACCA

In the 2013 Budget, George Osborne told parliament that he intended to “introduce a new limit” on Annual Managed Expenditure (AME) that would “bring real control to areas of public spending that had been out of control” yet do so in a way “that allows the automatic stabilisers to operate.”

Therefore, it was no surprise the chancellor used the June 2013 Spending Review to announce reforms to AME and reign in the ‘out of control’ element of public sector spending.

AME currently stands at £350bn (€408.7bn, $533.4bn) and accounts for almost half of the government’s annual expenditure. While the chancellor has made the first tentative steps towards tightening the purse strings on AME, there is still much more to be done to make this part of public finance more accountable.

The measures announced include a cap on certain elements of AME, including tax credits, welfare benefits and a temperature test for the winter fuel allowance of pensioner’s living abroad. The chancellor also announced that he would be expanding the role of the Office for Budget Responsibility (OBR) to monitor AME spending and issue a warning when the government is reaching the agreed limit.

Consequences

While this is a welcome move, he failed to offer further detail on the consequences of this limit being breached.

Given the demand-led nature of AME and the right of every UK citizen and some non UK nationals living in the UK, to claim benefits and a state pension, it seems unlikely that there will be a hard cut off point.

As a result, regular breaches seem likely, much like in other areas of the public sector where targets are routinely missed.

In order to reduce the cost of the UK’s welfare system in the long-term, the chancellor needs to take a structural look at AME expenditure and the drivers behind every expense.

A future focus on investing in preventative services is the best way to achieve long-term savings and this can only come from understanding local demographics and implementing measures to tackle the AME cost drivers in each local authority.

On a more strategic level, there should be greater emphasis on the costs of life, from cradle to the grave in all areas of public spending, which is something the government has struggled with for many years.

Emulating the US and Australia?

The UK would benefit from longer term fiscal strategies, similar to the US and Australia, where fiscal policy is planned out 50-75 years ahead. AME would also benefit from this kind of future planning.

In addition to capping AME, the chancellor could have explored the possibility of devolving some AME spending decisions to government departments or local authorities. They would then be responsible for spending these AME budgets in the way that they feel is most appropriate for their local area – making AME a more accountable part of public expenditure. Currently there is no accountability or scrutiny of AME, despite its high expenditure.

AME was originally introduced to control public expenditure and avoid arbitrarily cutting public services. However, over the years, that purpose appears to have been lost and AME spending has spiralled out of control.

It is encouraging to see that the chancellor is making the moves to manage this unaccountable and expensive section of the public purse. But he may have missed a golden opportunity to once and for all take a radical approach to AME.

Only time will tell if the changes made in the 2013 Spending Review go far enough to amount a long term reform.

This post was first published in International Business Times, July 2013

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Chas Roy-Chowdhury-14

 

By Chas Roy-Chowdhury, head of taxation, ACCA

Well that’s it for the fourth Budget of the Coalition Government, and what a bore it was.

There wasn’t really any surprises, partly down to the leak from the Evening Standard less than one hour before George Osborne began his Budget speech.

I can’t help but feel that this Budget was very bland and that more could have been done to boost the economy.

The Chancellor of the Exchequer should have considered a temporary cut to the basic rate of income tax to 15 per cent for one year, instead of leaving it at 20 per cent, as people would have more money to spend and it would help revive the economy.

At a time when the economy is stalling, it needs a genuine boost. Cutting the basic rate to 15 per cent until 5 April 2014 would have been a brave move, but would help working families across the UK. Under today’s proposals they, and many others, will not notice any difference. A temporary tax cut seems drastic but these are exceptional circumstances.

The other “highlights” of the Budget was the personal allowance increase. On the face of it, looks good, but it will only benefit the population who are currently 20 per cent taxpayers, of which there are fewer and fewer. By dropping the threshold for the 40 per cent income tax bracket, many hardworking people who will begin paying 40 per cent for the first time will not just lose the benefits of the increased personal allowance they will actually need to pay additional tax on such things as savings and dividends because of the way the UK system taxes the top slice of income.

On the issue of tax avoidance – while it is no surprise the Chancellor went after it, he will always be treading a fine line between collecting tax and denting the UK’s appeal as a business-friendly economy – an essential requirement for our recovery.

A tougher looking tax avoidance regime might look good to the public, but while the Chancellor has been making noises about a global effort to crackdown on tax avoidance, unilateral measures such as GAAR, risk diverting businesses currently in or looking to move to the UK into the arms of other markets. The question will be whether other business-friendly tax initiatives, such as the patent box and the lower corporation tax rate will help the UK remain appealing. Some evidence would suggest the rot is already setting in.

The Chancellor mentioned that those who actively promote tax avoidance will be named and shamed. ACCA has always said that a ‘loose’ name and shame approach to tax avoidance is counterproductive. Tax avoidance is not illegal. Naming and shaming can penalise individuals and business reputations when they have not broken the law. There is also an issue over where you draw the line There isn’t a clear cliff edge between what you could say is acceptable tax planning and what is unacceptable tax avoidance. There is difficulty in terms of when name and shame becomes appropriate. Is it something that is linked to the amount of tax that isn’t paid, or the way tax is avoided?

There is always the risk with any name and shame approach that it becomes disproportionate and that companies promoting perfectly acceptable financial planning initiatives are severely punished when they have operated within the mainstream rules.

We hope that the Government has looked in more detail at the PAC’s proposals and will consider naming and shaming only when there is repeated, heavy use by individuals of tax avoidance initiatives. A quicker and wider review of the tax system needs to be considered, than what the Office of Tax Simplification (OTS) is currently resourced to implement, with a view to radical simplification.

On families and tax credit – the downside of this initiative is that it is a 20 per cent tax credit, when a full payment subsidy of £1,200 would be a much more beneficial vehicle for many young families struggling to meet childcare costs, which are notoriously expensive. The nature of a tax credit means that where a family is forking out thousands of pounds a year, it is the “carer” that will receive the complicated tax credit. If the Government is prepared to pay up to £2,400 for two children there is no reason why they cannot give it to families as a subsidy, irrespective of the amount they actually pay for the care. A one-child family with two working parents would hugely benefit from the extra funds.

Should one parent lose their job or decide for the benefit of their child or children that they wish to stay at home, the loss of this credit will be felt.

And then we turn to fuel duty – ACCA predicted the rise in fuel duty would be scrapped. That will be welcomed by households as well as businesses in the UK. ACCA’s Drivers for Change survey report showed that UK businesses identified fuel costs as a major short term challenge, so this may give them respite.

So is this a Budget for an “aspiration nation”, and for hardworking families? Time will tell…

Don’t forget to have a look at our coverage of the Budget as it happened here