Keynote speech by Lucy Frazer MP, Financial Secretary to the Treasury

I’d like to start by saying a huge thank you to Ryan Shorthouse and to Bright Blue for the invitation to speak at today’s event… which is a really important opportunity to reflect on the future of tax… the what, the how and the why…

And I want to congratulate Bright Blue for the pioneering work you’ve been doing.

Stanley Baldwin, one of my predecessors as Financial Secretary to the Treasury, said: “I am not struck so much by the diversity of testimony… as by the many-sidedness of truth.”

The point being, I think, that we can all disagree with each other… and, at the same time, all be right.

Which is why it makes such good sense for Bright Blue to have assembled such an impressive team of cross-party thinkers as part of your independent Tax Commission.

The way we tax – the integrity of the tax system – fundamentally reflects the nature of a society.

Because a successful tax system relies on trust.

Trust, that we will set the right rates, trust that others will pay it and trust that as a government we will spend our revenues well.

Which is another reason why we must get it right.

In the next 25 minutes or so I want to make my contribution to the various ongoing debates around taxation… and explore some ideas around what a tax system is meant to do, and ways that we can achieve that.

And I’m going to focus on things like fairness, the tax gap, the size of the state, supporting enterprise, skills and R&D, modernisation, and, finally, on honesty…

…in particular the notion that government has a responsibility to be honest with the public about taxes… and to tell it like it is.

There’s a widely held – and possibly understandable view – that tax is somehow only about taking.

But really it’s about spreading possibility.

It’s about the public trusting the government they elect to spend and invest on their behalf… for the common good.

And, sitting where I sit, it’s hard to think of many bigger responsibilities than that.

Wider background

I’m going to start with some context.

There’s no need for me to revisit the circumstances or details of the pandemic, other than to thank staff at HMRC for their heroic efforts during the last two years.

The Government has now turned its attention to economic recovery and renewal and is expanding its crucial efforts on initiatives such as levelling up.

Of course, we now face a new global threat, in the shape of Russia’s unprovoked and premeditated assault on Ukraine.

You will know we have delivered the largest package of sanctions in our history and unprecedented measures to isolate the Russian financial system for years to come.

And I am proud that as Financial Secretary I have been able to play a minor part…by withdrawing our cooperation with Russia on sharing tax information…

…By announcing our intention to delist the Moscow stock exchange and by making it easier for those who want to help send humanitarian aid through customs to Ukraine.

Turning now to the domestic picture, we’re acutely sensitive of the cost of living challenge.

But we will also continue to take our economic and fiscal responsibilities extremely seriously:

At the time of the Spring Statement, the Office for Budget Responsibility had forecast growth this year of 3.8%.

It expects this to be followed by 1.8% in 2023, and 2.1%, 1.8% and 1.7% in the three years after that.

Meanwhile disruptions to global supply chains and energy markets, combined with the economic response to the invasion of Ukraine, mean that the OBR expects inflation to rise to an average of 7.4% this year, peaking at 8.7% in Q4, before falling back below the MPC’s 2% target in 2024 and 2025.

Debt is set to pass £2.3 trillion, reaching 95.6% of GDP… while this financial year we’re forecast to spend £83 billion on debt interest – the highest on record – and a powerful argument for getting the debt down in the coming years

All in all, that makes for challenging times… and has important implications for future taxation.

The state of taxation

When it comes to the realities of the current tax burden there are some commonly held truths… but some widely held misperceptions too.

For instance, it is indeed high.…

But I want to put paid to the notion that the burden in this country is greater than that of our peers.

Because it’s not. In fact, we are likely to continue to maintain our place more or less in the middle of the G7…. with a tax rate lower than Germany, lower than Italy and lower than France.

The tax burden on individuals specifically, is actually forecast to be the lowest in the G7… a result of generous allowances on income tax and relatively moderate rates for both income tax and national insurance contributions.

We have a highly progressive tax system.

The top one per cent of Income Taxpayers are projected to have contributed 28 per cent of all Income Tax in 2021-22, up from 25% a decade earlier.

And the top five per cent paid nearly 50 per cent of all income tax, up from 43 per cent over the same timeframe.

Next steps

Having said that, our goal as a government is both to reform and reduce taxes.

The Spring Statement set out the Government’s tax plan, which includes three key priorities:

First, we’re acting now to help families with the cost of living.

Second, we’re cutting and reforming taxes in three key areas – Capital, People and Ideas – to create the conditions for private sector-led growth.

And third, we’re sharing the proceeds of growth fairly through cuts to personal taxes…letting people keep more of what they earn.

My belief, pure and simple, is in the greatest practical market freedom… within an overall framework of financial discipline.

That doesn’t, by the way, mean that we can’t or won’t step in when we need to.

A clear example is the roughly £400 billion we spent to support households and businesses during the pandemic, protecting jobs and livelihoods the length and breadth of the country.

The right principles

That’s a survey of the economic and policy context.

But I want to get onto some of the big ideas which underpin discussions around taxation… the first of which is fairness. Something which I know Bright Blue’s vision for tax reform also talks about.

I’d argue that businesses often demonstrate fairness… and that’s what we’ve seen both when multinationals have shut down operations in Russia, and when companies have repaid money they received from the furlough scheme.

And fairness is something, as individual human beings, that we feel very intuitively.

In his book ‘Morality’, the late Rabbi Lord Jonathan Sacks recounts a psychology experiment in which four players, unknown to each other, are each given $20.

Players secretly put however much money they want into a central kitty.

The total – all the money from the four players – is doubled, then shared equally between them.

What that means in reality is that it pays to let other people contribute while you hold back… because you get a quarter of the doubled kitty, on top of the money already in your hand.

That’s still the case even if you sit there with your arms crossed and do nothing.

And so slowly, one by one, that’s what happens, in part because people’s sense of fairness is offended.

Realising that they’re being taken advantage of, eventually no-one contributes anything anymore. That is the case even though contributing benefits everyone… because the total pot increases.

As Lord Rabbi Sacks puts it: ‘There is now no common good, only individual private goods and people give up their potential gains because their sense of justice is outraged.

That experiment has been replicated in lots of different settings… including with teenagers… and it highlights the existence of this innate sense of fairness we seem to be born with.

What does that mean for the way we tax?

Well, quite simply, for me it means that taxes need to be fair – and they need to be seen to be fair.

We’re all basically happy to give something up for the greater, communal good… for instance, by helping to fund state healthcare or education… but there’s a limit to what people are willing to pay, and they adjust their behaviour accordingly.

Linked to that are discussions around the Laffer Curve, and the notion that tax cuts can pay for themselves… partly because people are more inclined to pay their taxes, and partly because greater growth as a result of lower taxes more than compensates for the lost revenue.

I recognise there’s a lot of debate about where we sit on the Laffer Curve. And

I notice for instance, that Stuart Adam of the IFS recently told the Treasury Select Committee that ‘the Laffer Curve is a real thing…it exists but that ’the shape of the Laffer Curve, and the peak of where the Laffer Curve is, will be different for every bit of every tax and in every different circumstance’.

The point is that it deserves our scrutiny and our consideration and should absolutely be a part of the debate.

The Tax Gap

The flip side of any discussion of fairness is the tax gap – HMRC’s estimate of the difference between the taxes that are owed and that are actually paid.

In the UK, the tax gap was around £35 billion in 2019-20, equivalent to 5.2% of theoretical tax liabilities.

The good news is, that that’s part of a long-term downward trend, falling from 7.5% in 2005-06… the result of government efforts to tackle tax evaders, and to help people to get their tax right by promoting good compliance and reducing the opportunities for error.

In fact, in little more than a decade we’ve introduced over 150 measures to tackle tax avoidance, evasion and other forms of non-compliance.

And those measures, alongside HMRC’s wider work, have secured and protected over £250 billion for public services since 2010.

But the gap is still too wide… because it represents money owed to the Exchequer which could otherwise be available to spend on frontline public services and next-generation infrastructure.

We’re not at all complacent about this. Since last year we’ve introduced an additional 20 measures to tackle tax avoidance, evasion and non-compliance – forecast to raise an estimated £6.3 billion over the next 5 years.

These include implementing Making Tax Digital, our reimagining of the way businesses keep their records and submit their tax returns.

We’re also focused on delivering a trusted, modern, digital tax administration system for businesses and their agents to help them get their tax right the first time.

And, at last year’s Spending Review we provided almost £300 million for HMRC to invest in additional support across all forms of compliance activity.

This is all important… because again it’s about fairness… so we won’t take our foot off the accelerator.

Another more nuanced aspect of ‘fairness’ is the role taxation can play in wider societal issues, for instance, in helping us bring down carbon emissions as part of efforts to tackle climate change.

The Government is committed to carbon pricing as one of the most efficient tools for decarbonisation… and it’s clearly going to play a key role in helping us get to Net Zero.

Carbon pricing – or in other words applying a cost to carbon emissions to encourage polluters to reduce the amount of greenhouse emissions they produce – is ‘fair’ because it makes sure that polluters pay.

In addition, it provides funds that Government can deploy on other priorities – including environmental objectives.

The problem is that different ambition in different countries creates space for the risk of ‘carbon leakage’. This means that the carbon our policies are designed to stop ends up being emitted if an activity is displaced to a country with a less ambitious climate policy.

The best and fairest way to address carbon leakage would be for all countries to move in lockstep… and we’ll continue pushing for a common global approach.

In the meantime, we will need to continue to look at ways that we can protect the UK from carbon leakage and level the playing field for UK businesses, while continuing to make progress towards our Net Zero targets.

The size of the state

So that’s fairness… a complex but crucial concept in taxation.

The second key issue I want to address in considering how to think about taxation is the size of the state.

It has been said that ‘when the state owns, nobody owns, and when nobody owns, nobody cares’….

Quite simply, an overly large state which does everything takes away the responsibility of others. It takes away the responsibility of communities, families and schools to society as a whole.

The nub of it, I think, is that the state needs to understand its limits. Which isn’t a particularly surprising thing for a conservative minister to say, but I still think it’s worth making the point.

Circumstances have rightly required the Government to take on massive responsibilities over the last two years. But we need to get back to normal as soon as we reasonably and responsibly can.

To draw a historical parallel, debt peaked at 270% of GDP after the Second World War following massive fiscal expansion to support the war effort.

However, it was then gradually and consistently reduced until – significantly helped by growth in GDP itself – it fell below 40% at the beginning of the 1980s and didn’t exceed that level again until the Global Financial Crisis.

There’s a natural tension here. Particularly for a government which has borrowed significantly to help households and businesses through the pandemic.

It’s not my job to decide how much we spend as a government. But we can all reasonably ask where the limit of public spending should lie – not least because of its implications for taxation.

Growth and Enterprise

The truth is that economic success comes from people and businesses. We believe it’s our job as a government to create the conditions for that.

So that is the third major issue I want to explore.

It’s clear that economic success requires a competitive and stable tax system which provides business with the confidence to invest and expand.

This is a principle that’s at the heart of the Chancellor’s tax plan.

And I know that Bright Blu

Share on Facebook «||» Share on Twitter «||» Share on Reddit «||» Share on LinkedIn